The U.S. Postal Service is warning banks of a money order scam being run from the Mississippi State Penitentiary.

Last year, banks lost nearly $2 million by cashing altered money orders from inmates in the Parchman, Miss., prison.

"It's virtually a cottage industry," said David Higginbotham, a postal inspector based in Memphis. "Banks in all 50 states have been victimized by it."

How It Works

Mr. Higginbotham said the scam has been in operation for years, but last fall the number of bogus money orders entering banks surged to 500 a month. The pace has since dropped to 100 a month.

Here's how a convict can loot a bank: A visitor gives an inmate a money order worth $1 to $5.

The face value of the money order is then altered using bleach, a simple cut-and-paste technique, or word processors and dot matrix printers available in the penitentiary.

The inmate then persuades an unsuspecting pen pal to deposit the money orders in his bank account.

Days later, the inmate asks the pen pal to withdraw the funds from the account and mail them to a friend on the outside.

Seniors Targeted

Mr. Higginbotham said inmates typically target elderly women and make up stories that they have been unjustly convicted.

They also say the funds are urgently needed to pay attorneys' fees.

"The bank has no reason to question her," Mr. Higginbotham said. "She has been a loyal customer."

Once the funds are withdrawn the banks have little recourse except to sue the customer. But cracking down on an elderly woman duped by a convict doesn't play well in the local media, Mr. Higginbotham said.

Too Little, Too Late

To stop the flow of bogus money orders from entering banks, Mr. Higginbotham travels to institutions to teach tellers how to recognize the altered paper.

But "banks don't request us to come out until they are victimized," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.