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Check Please

By Blair Rugh 29 Jun 2016

We have had several questions from customers recently about where the liability lies when a check is deposited by a customer first by a mobile device and then the actual item is deposited. Apparently, fraudsters are catching on to a new way to profit at the expense of their local bank. In one reported instance, a person opened accounts with three different banks and signed up for their mobile deposit product. The person then deposited the check through the mobile facility in all three banks. If the perpetrator was really smart, and most fraudsters are, he or she was standing in the lobby of the paying bank and then cashed the item in the teller line.

First, the paying bank, that is the bank on which the check was written, is only going to pay the item once.  If a check is presented to the paying bank three times, it will pay the first presentation in the queue and return any subsequent presentations. It is not a Regulation CC issue but rather a matter of state law. To my knowledge, in most states, the first presenter of an item wins. If an item is presented to your bank twice and you pay it twice, the loss is between you and your customer.  Likewise, if the item presented to you has already been paid by the time your presentation gets to the paying bank, you are on the hook.

With all items not being local, the best protection that a depository institution has is to know your customer. Secondly, where appropriate, delay availability of deposits to the greatest length available. Remember, checks deposited by way of remote deposit are not considered to have been made in person with an employee of the depositary bank, nor deposited at an ATM. This means Regulation CC funds availability does not apply to these deposits. Almost all banks are now sending and receiving their cash letters electronically; so, returns are usually expeditious. Generally, you are safe if you have not allowed the customer to make the withdrawal.

Security considerations for mobile deposits should include some type of anti-fraud geolocation restrictions (such as near check cashing facilities), duplicate detection software, software to auto-check face of check or draft for inconsistencies and multifactor authentication programs.

Who is liable for altered checks?

Company A writes and mails a check to its vendor, Company B, on its account at Friendly Bank. The mail is intercepted, and the interceptor alters the name of the payee to its name and deposits it in its account at Nasty Bank. Nasty Bank then sends the item through the Fed to Friendly Bank who pays the item. Company A realizes the alteration and notifies Friendly Bank. Now what happens?  First, Friendly Bank is required to credit Company A’s account for the amount of the check. Friendly Bank then makes a claim to the Fed and Nasty Bank. At the end of the day, Nasty Bank is responsible; its only recourse is its ability to collect from the interceptor depositor.

Let’s review the bidding

I have read in recent weeks where a bank loan officer and a couple of BSA officers were fined by the regulators for some apparently pretty egregious things that they did. I have no problem with that. If someone knowingly breaks the rules, they should be punished. But the regulators are going after the minnows while the great white sharks are still freely swimming around.  Since the housing crisis, the major banks have been fined and penalized over $200 billion for fraud in their handling of subprime mortgages and more recently for currency market manipulation. $200 billion in fines and penalties goes way beyond regular garden variety fraud. Fraud, whether civil or criminal or both, is an act of intent. If I sell you a Babe Ruth baseball trading card and tell you it is genuine and it proves to be a fake, that is not fraud – if I truly thought it was genuine. On the other hand, if I knew it was fake, then that is fraud.

Someone in the upper levels of management in the big banks knew what they were doing and did it anyway, but no one has been prosecuted (at least to my knowledge). One of the biggest fines was $16 billion against Bank of America. At the time, the Justice Department said that it was investigating some of the BofA executives. Nothing ever came of it (again, at least that we are aware). I assume the executives continued to receive their bonuses.

Because of all of this, we did not have just a few consumers affected, there were millions. If the CFPB really wanted to prevent this type activity in the future, it would prosecute a few executives. Then in the future, others might be dissuaded from their misguided activities. 

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