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ERAI Blog

Check Fraud – Who is Liable?

Mary Dunham
ERAI, Inc.

You may be surprised to learn that depending on the circumstances and your state’s laws, the person who cashes or deposits the fraudulent check may be held responsible. 

The Federal Trade Commission reports that not only are counterfeit check scams occurring more frequently, the counterfeit checks are becoming harder to identify.   High quality printers and scanners, authentic-looking watermarks, copied facsimile signatures, authentic names and addresses of legitimate financial institutions, as well as real routing numbers and account numbers are all being used to perpetrate this fraud. These counterfeits range from cashier’s checks and money orders to corporate and personal checks. 

You may be asking yourself why can you be held responsible and the bank not.  Under federal law, banks are required to make funds available to you within 1-5 days.  Official checks, such as US Treasury checks, government checks and bank checks [cashier’s checks, certified checks, and teller’s checks] are usually made available one day after deposit.  The problem is, while the funds are available, the funds are not really yours until the check “clears”. 

Processing a payment actually takes longer than 1-5 days.  Your bank accepts the deposit based on your identification – they have no information about the source of the check.  Your bank then sends the check to the source.  Say for example that the check allegedly came from a real company (as was the case in a blog post recently made by ERAI titled:  Bad check scam – ERAI Members’ identities being used to commit fraud). The real company does not become aware of these charges until they appear on their statement.  In the meantime, you’re responsible because it is assumed that you are in the best position to determine the risk of accepting the check – you dealt with the person who gave it to you.  Until the bank confirms that the funds were actually deposited into your account, you are responsible for any funds drawn against that check.

In addition to collecting funds from you, the bank may also charge a fee, particularly if the reversal results in NSF checks, etc.  Banks may also freeze or close your account or take money from other accounts you have at that bank, bring suit against you to recover the funds, or report you to a checking account abuse databasei.  In some cases it is possible that law enforcement could bring charges against victims because it may look like they were involved in the scam and knew the check was counterfeit.ii  FDIC insurance does not cover losses due to theft or fraud. 

What rights do you have?  Ordinarily, you would seek repayment from the person who wrote the check to you.  Realistically, however, if the scammer lives in a foreign country, has disguised his identity or has disappeared, your chances of recovering the money are not good.

Under the Uniform Commercial Code, a payor bank may only debit a drawer’s account for checks that are “properly payable”.  Let’s define some important terms.  A customer is the person with the account at the bank.  A drawer or maker is the person writing the check.  A drawee is a party, typically a bank, required to pay out money when the check is presented.  A payee is the party entitled to receive funds from the payor bank, usually the drawee.

In most cases, a drawee is liable for claims involving the signature on the face of the check and the depository bank is liable for claims involving the payee’s endorsement on the back of the check. A drawee’s liability for forged signatures of the drawer arises because the drawee bank keeps the drawer’s signature card on file and is held responsible for verifying the signature.  This is not always the case when facsimile signatures are used, as will be discussed later in this article.iii

According to the National Check Fraud Center, revisions to the UCC define responsibilities for check issuers and paying banks under the term ordinary care.  Under Sections 3-403(a) and 4-401(a), a bank can charge items against a customer’s account only if they are “properly payable” and the check is signed by an authorized individual.  However, if a signature is forged, the corporate account may be liable if one of the following exceptions applies:

• According to UCC Section 3-103(7), ordinary care requires account holders to follow "reasonable commercial standards" prevailing in the area for their industry or business. Under §3-406, if they fail to exercise ordinary care, they may be restricted from seeking restitution from the payee bank if their own failures contributed to a forged check signature or an alteration (for example, raising a check amount from $50 to $5000).
• Section 4-406 also requires customers to reconcile their bank statements within a reasonable time to detect unauthorized checks. This typically means reconciling statements as soon as they are received. (*Note:  If you have any chance of recovering the funds from the bank, you must reconcile your accounts as soon as possible, preferably within 30 days of receipt.)
• The concept of comparative fault - Sections 3-406(b) and 4-406(e) - can shift liability to the check issuer. If both the bank and corporate account holder have failed to exercise ordinary care, a loss can be allocated based upon the extent that each party's failure contributed to the loss. Since banks are not required to physically examine every check, companies may be held liable for all or a substantial portion of any given loss - even if the bank did not verify the signature on a fraudulent check.
• Liability for counterfeits that are virtually identical to originals will be examined on a case-by-case basis. The process used when issuing the check will be reviewed to determine if the company exercised ordinary care or contributed to the loss.iv

A 2000 court case, Spear Insurance Co. v. Bank of America, N.A., 40 UCC RepServ 2nd 807 (IL 2000), ruled that a bank may escape liability for its payment of counterfeit checks bearing a customer’s forged facsimile signature if the bank and customer have agreed that the bank can honor checks purporting to bear the customer’s facsimile signature.  In this particular case, a publishing company had several accounts with Bank of America (BOA).  In one month, BOA paid seven (7) counterfeit checks drawn on one of the accounts bearing the forged signature of the company’s Chief Financial Officer.  When this was discovered, the company demanded reimbursement from the bank.  The bank refused and the company's insurance carrier paid the company for its loss and sued the bank to recover the funds. 

There was an agreement between the company and BOA that expressly authorized the bank to pay checks bearing facsimile signatures resembling the authorized signatures on file with the bank.  The court found that the facsimile signature on the counterfeit checks closely resembled the facsimile signature of the CFO.  Thus, the court held that the bank was not responsible for the company’s losses.v

In order to minimize your potential losses, you should:

1. Make sure your bank is kept current on who is authorized to issue and sign checks for your company.
2. Limit the number of people authorized to issue and sign checks.
3. Review your canceled checks and statements as soon as possible after receipt, in order to be sure they have been properly issued and paid.vi

Further steps you can take to protect yourself:

• Know the difference between funds being available for withdrawal and a check having cleared. 
• Know who you are dealing with and never wire money to strangers.  Be cautious when accepting checks, even cashier’s checks, from people you don’t know, as recovery can be difficult or impossible if things go wrong.
• When selling, never accept more than the price of the goods.
• If a buyer insists on using a particular escrow service or online payment service, check it out for yourself. Go to the official website, familiarize yourself with their terms and conditions and call the customer service line.  If in doubt, don’t use the service.
• If you accept checks, stipulate that it be drawn on a local bank or a bank with a local branch.  Then call or visit the bank to verify the validity of the check. Be sure when doing so to get the bank’s phone number yourself and do not use the number provided by your customer.
• If a buyer insists that you wire back funds, end the transaction immediately.
• Be wary of taking action before you can be sure that the payment is good.
• Save all your documents.

What do you do if you are a victim?

The first thing to do is contact the issuing bank directly to report receipt of the check.  Then contact your bank and explain that you’ve been scammed.  Ask that they not take any negative action against you or if they’ve already done so, ask if they can reverse these actions.  File a report with your local police.  If you’ve already sent the cash and do not have enough money in your account to pay it back, try to negotiate a repayment plan with your bank.  It is also recommended that you contact the Federal Trade Commission at 1-877-FTC-HELP or www.ftc.gov; The FBI Internet Fraud Complaint Center at www.ic3.gov; and if the scam involves the US mail, the U.S. Postal Inspector Service, by phone at 1-888-877-7644 or postalinspectors.uspis.gov/forms/MailFraudComplaint.aspx

___________________________________________

i) http://fakechecks.org/prevention-faqs01.html
ii) http://www.fraud.org/scams/general-frau/fake-check-scams
iii) http://www.thenortongroup.net/nnotes1.html
iv) National Check Fraud Center; “Check Fraud – Who is Liable?”,  www.ckfraud.org/liable.html
v) http://business.cch.com/banking/news/dln4-8-00.htm; “Court Rules Bank Not Liable for Paying Counterfeit Checks”, by Craig W. Smith, J.D., Authori, CCH Deposit Law Notes.
vi) http://www.thenortongroup.net/nnotes1.html


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