Check Fraud

Until they are victimized by bank account fraud, few people realize the disruption that can result from someone else’s illegal use of their account information. One might think that with mobile and online banking that the problem has gone away. But people love their paper checks. And fraudsters haven’t yet gone away – one report I recently read stated that ninety percent of all banks still deal with check fraud losses. Indeed, another report found more than $13 billion in actual and attempted check fraud losses as recently as 2015.

The most common types of fraud involve (1) stolen checks; (2) “blank” checks that have your account information contained at the bottom just like your real checks; and (3) altered checks that differ in a variety of ways from the check you originally wrote.

In each instance, the thief generally obtains one of your checks, sometimes by stealing it from the mail. An unscrupulous vendor may take account information from a payment check and use it to defraud you. Or your cancelled checks may be taken from your garbage and used to create checks that contain your bank account information (the numbers at the bottom) but with a different name as the account holder. The possibilities are only limited by the creativity of the thief. Businesses aren’t immune either – I’ve seen both 80 year old widowers and larger businesses defrauded by the same scheme.

Your first goal should be to minimize the chances of being victimized by this type of fraud. Your second goal should be to minimize the disruption and angst that will result from your failure to protect against check fraud.

How, then, can you help to prevent check fraud? First, use common sense:

• Don’t leave checks in your mailbox for pickup by the postal carrier since they might easily be stolen;

• Don’t give your account information to people you don’t know or don’t trust;

• Unless needed for tax purposes, destroy old cancelled checks and bank statements – preferably by shredding; and

• Regularly reconcile your bank statements with your check register and otherwise review your statements for suspicious activity.

Second, spend a few minutes and check out the following web sites which contain more detailed information on how to avoid some of the more common, as well as the more esoteric, types of fraud: The National Check Fraud Center (www.ckfraud.rog) and The National Fraud Information Center (www.fraud.org) are great starting points.

Despite your best efforts, or perhaps due to a lack of any effort whatsoever, you end up as the victim of check fraud. What now? The law, in general, puts the obligation on you as the account holder to discover fraud. The easiest way to do so is by religiously scrutinizing your monthly bank statements for anything that looks suspicious. Obviously, reconciling that statement to a check register is the easiest way to uncover fraud. Don’t delay, however, as you generally have 30 days to report any suspicious activity. Fraud reported more than 30 days after receipt of a bank statement will be very difficult to reverse under current law.

Now that you have reported the fraud in a timely manner, what does the law say about who bears the responsibility for the fraudulent payment? The details of this legal issue have taken up page after page of statutes and cases, and are beyond the scope of this article. Still, there are some general principles that will help guide you through the aftermath of check fraud.

First, the law imposes a duty of ordinary care on the business (as compared to the individual) account holder. That is, if your business did something, or failed to do something, that resulted in the fraud it may have to bear some of the loss. A company that fails to properly screen its bookkeeper or that fails to safeguard its corporate checks may well end up suffering the loss. Again, common sense rules. Likewise, if an employee forges an endorsement on a check payable to the employer, or a company check payable to a supplier, and cashes the check, the employer will likely be held liable for the loss. Note, though, that this principle doesn’t apply to the typical consumer account.

Second, the policy behind the relevant laws is that the burden should be borne by the party in the best position to prevent the loss. This is particularly true for the non-business customer. In other words, so long as the customer reports the fraud in a timely fashion the bank will typically take the hit. Generally speaking, it is in the best position to detect the fraud. Keep in mind, however, that in most instances you are under an obligation to cooperate with the bank. The bank will likely refuse to credit your account for the stolen funds if you refuse to assist the bank in pursuing the thief. For example, if a family member perpetrates the fraud, your refusal to provide testimony against that family member may cost you dearly.

Beyond this generic type of check fraud, there’s another, and increasingly common, form of check fraud that I also wrote about a few years back that bears repeating. Businesses are particularly being targeted in this scheme, and it involves fraudulent cashier’s checks. Basically, an unsuspecting mark deposits what looks like an official cashier’s check. Typically, the checks look good enough for the bank to provisionally advance money based on the deposit. But some weeks later, when the fraud is discovered, the provisional advance is reversed. During that time the victim used those provisionally advanced funds – typically for the benefit of the scammer. The point? Be aware that even a cashier’s check can take several weeks to clear before being indubitably placed in your account. Don’t be afraid to call the issuing bank to confirm details (with a phone number you’ve looked up rather than one that was provided to you). If in doubt, “run away” or insist on a wire transfer (where funds are “cleared” almost instantly).

Exercise common sense, protect your financial information, and hopefully you will avoid check fraud.