Check Fraudster Exploits a $30M Banking Loophole
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Summary
Takeaways
- ❖Avery Ays, a former Air Force member, used his programming knowledge to modify a check program, enabling him to create fraudulent checks.
- ❖His unique fraud method involved slightly raising and slanting routing and account numbers on checks, causing them to continually circulate in the Federal Reserve clearing house without bouncing.
- ❖Initial fraudulent checks were for smaller amounts, but the scheme escalated to hundreds of thousands, eventually totaling millions, deposited into mutual funds.
- ❖The first fraud operation was exposed when a co-conspirator purchased a Ford Expedition in cash, triggering an IRS/FBI investigation due to his low income.
- ❖Ays meticulously hid his cash in a storage unit and destroyed all evidence (computer, printer, paper) by burning or discarding them in different locations.
- ❖After his first prison release, Ays participated in paid pharmaceutical 'lab studies' across the US to earn income, often staying in facilities for weeks or months.
- ❖He deliberately maintained a 'poor' appearance and drove an old car to avoid suspicion from his supervised release officer, who suspected he had hidden money.
- ❖Ays was later involved in a wire fraud scheme, where he received stolen funds from an HSBC account, unknowingly connected to a dormant account and an insider.
- ❖During his second case, Ays's research uncovered HSBC's non-disclosure agreement with the federal government regarding money laundering, which became a leverage point in his plea negotiations.
- ❖He served two federal prison sentences and is now a paralegal, an AI-certified consultant, and a Republican candidate for Congress in Texas's 38th district.
- ❖Ays emphasizes 'affordability' as a core issue in his political campaign, arguing that basic needs like housing and food supersede international concerns for most citizens.
- ❖He believes AI will reshape the economy and advocates for re-educating the workforce to adapt to new job opportunities, rather than relying on universal basic income.
Insights
1Exploiting the Federal Reserve Check Clearing House
Ays discovered and exploited a loophole in the Federal Reserve's check clearing system. By slightly altering the routing and account numbers (raising them a millimeter and slanting them), he caused fraudulent checks to continuously circulate within the system, appearing valid and allowing funds to be withdrawn before the originating bank could identify them as fraudulent and return them.
When I rewrote the program of this check program, I went in and changed some things on it... I raised the numbers, the the account number and the routing numbers. I raised them a millimeter and kind of slanted them a little bit. So when they went through they would continually circulate circulate. The bank would say okay the the money the check is good hadn't come back. So it would keep circulating circulating circulating and they would give you the money.
2Mutual Funds as a Fraud Vector
Ays identified mutual funds as an effective channel for cashing large fraudulent checks. Mutual funds are accustomed to receiving large deposits and are less likely to question them immediately, providing a longer window for funds to clear before the fraud is detected.
I said, 'Mutual funds, they go through. They go through. They won't question it.' Yeah. Because they're used to getting big big. They're used to getting big checks.
3Post-9/11 Banking Regulations and Structuring
After 9/11, banking regulations tightened significantly, making it impossible to withdraw large sums of cash without triggering suspicious activity reports. Ays describes 'structuring' withdrawals (taking out amounts just under the reporting threshold multiple times) as a common tactic to circumvent these new rules.
Now it's pre, it's post 911. Okay. So now you can only get what? 9,900 $9,900. That's it. ... Before you have to fill out a a a cash transaction report, suspicious activity or Yeah. triggers a suspicion. Sometimes you could even get out five or 6 thousand, but if they notice you do it several times, they're like, you this this is the third time this week he's come. This is this is they call structuring. He's structuring getting out more than 10,000 by not taking out at the same time.
4Leveraging HSBC's Non-Disclosure Agreement
During his second wire fraud case, Ays's legal team discovered that HSBC had a non-disclosure agreement with the federal government related to money laundering. This agreement obligated HSBC to report suspicious activities, which they failed to do in his case. This information was used to negotiate a more favorable plea deal, as the government wanted to avoid publicizing HSBC's non-compliance.
I get to research in HSBC. They are criminals... They had some issues. The big issues. They were mindaundering big time for the cartels... and they got a non-disclosure agreement with the federal government. ... Well, the judge didn't know that. ... when my lawyer went to the US attorney with it, he didn't know about it. He know about the non-disclosure agreement. ... Which means those funds came out of not a dormant account, but a member account. ... So it's part of their moneyaundering operation. ... So what they did, they're like, 'Okay, you take a plea for 60 months, no problem. We'll put you on uh threeear supervisor release and be done with you.' ... Because they didn't want me to start talking to the news media. Hey, HSBC got they have an a non-disclosure agreement where they're supposed to tell the government about all that's going on. And they didn't. They didn't want that out.
Bottom Line
The vulnerability of the banking system to subtle, technical manipulation, particularly in the check clearing process, allowed a single individual to generate millions in fraudulent funds for an extended period.
This highlights that even seemingly minor technical alterations can create significant financial exposure if they exploit fundamental process flaws, underscoring the need for continuous, in-depth security audits of core financial infrastructure.
Financial institutions could invest in advanced AI-driven anomaly detection systems that analyze micro-level changes in transaction data (like font or alignment discrepancies in scanned checks) rather than just macro-level patterns, to catch sophisticated, low-signal fraud attempts.
Paid pharmaceutical 'lab studies' serve as a significant, albeit risky, income source for individuals with limited options, particularly ex-convicts, offering substantial cash payments for participation.
This reveals an unconventional economic niche that caters to a specific demographic, providing a means for financial stability outside traditional employment, but at the potential cost of personal health.
Organizations focused on re-entry programs for ex-offenders could explore partnerships with legitimate clinical trial companies to vet and connect participants, ensuring ethical practices and providing a structured, albeit temporary, income pathway for those seeking to rebuild their lives.
Opportunities
Clinical Trial Participant Recruitment and Support
A service that vets, prepares, and supports individuals (especially those with limited employment options, like ex-offenders) for participation in legitimate pharmaceutical lab studies. This would involve matching participants to suitable trials, providing health monitoring, and ensuring they understand the risks and benefits, potentially offering a safer and more informed pathway to this income source.
Key Concepts
Information Asymmetry
Ays exploited information asymmetry in the banking system, understanding technical loopholes (check clearing process, mutual fund operations) that bank employees or authorities did not immediately recognize, allowing his fraud to persist.
Operational Security (OpSec)
The narrative highlights the critical role of OpSec in criminal enterprises. Ays's meticulous efforts to hide money, destroy evidence, and maintain a low profile contrasted sharply with his co-conspirator's failure, leading to the downfall of the first scheme.
Adaptability and Resourcefulness
Ays demonstrated adaptability by transitioning from military service to fraud, then to 'lab studies' for income, and finally to legal work and politics, consistently finding ways to navigate challenging circumstances and leverage his skills.
Lessons
- Implement multi-layered operational security measures, including physical asset concealment and meticulous evidence destruction, to minimize exposure in high-stakes illicit activities.
- Exercise extreme caution when involving multiple parties in sensitive operations, as a single individual's lapse in judgment (e.g., conspicuous spending) can compromise the entire network.
- Thoroughly research the legal and financial landscape, including obscure agreements or systemic vulnerabilities (like HSBC's non-disclosure agreement), as these can provide critical leverage in legal defense or expose opportunities.
Notable Moments
Ays's friend shows him a large check and asks if he can 'change it,' initiating his entry into check fraud.
This marks the pivotal moment where Ays, despite having two legitimate jobs, is drawn into criminal activity due to his unique skills and perceived trustworthiness by his friend.
A co-conspirator buys a Ford Expedition in cash, triggering an IRS report and FBI investigation that unravels the entire check fraud operation.
This highlights the critical importance of operational security and how a single, seemingly minor, conspicuous act can lead to the downfall of a complex criminal enterprise.
Ays's discovery of HSBC's non-disclosure agreement with the government regarding money laundering during his second federal case.
This reveals a significant systemic vulnerability and a unique legal leverage point, demonstrating how deep research into institutional practices can impact legal outcomes.
Ays's decision to run for Congress, emphasizing 'affordability' and a pragmatic approach to AI's impact on employment.
This marks a complete transformation from his past, showcasing his commitment to legitimate public service and his unique perspective shaped by his experiences.
Quotes
"I raised the numbers, the the account number and the routing numbers. I raised them a millimeter and kind of slanted them a little bit. So when they went through they would continually circulate circulate."
"The mutual fund cleared with no problem. ... Well, the programming allows me to raise the the ring number and the bank number, so it's going to go through. It's going to go through for quite some time."
"The FBI agent labeled me a a danger to the banking industry cuz what we did, nobody had ever done it because those checks were coming back."
"Nothing else matters if you can't keep a roof over your head, buy food, pay your bills, take care of your kids, which is getting harder and harder. Nothing matters."
"AI did not come here to diminish your mental capacity. It came here to upgrade your mental capacity."
Q&A
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