Who is liable for check fraud? The person who created, forged, or altered the bad check is liable. But as they are very infrequently caught, the account holder, the drawer bank, or the drawee bank tends to bear the burden of the losses. The liable party varies based on the type of check fraud, the promptness of discovery, and several other factors.
A maze of regulations governs liability for check fraud losses. The Uniform Commercial Code (UCC), the ECCHO Forged and Counterfeit Warranties (aka “Rule 9”), and a variety of state laws shape the liability landscape. As a banking professional, you should understand these rules, but you should also be aware that there is a lot of subjectivity involved.
The following is an overview of liability considerations based on the type of check fraud, but it is not intended as legal advice. Consult with an attorney if you’re unsure of liability and trying to decide how to proceed. If you want help to reduce your risk of fraudulent checks, contact us at SQN Banking Systems today.
Altered Checks
Thieves can alter the face of a check in many different ways, but typically, they change the name of the payee or increase the amount of the check. The UCC states that the bank should not honor a check that is not properly payable, meaning that the bank should never honor an altered check. However, accepting the check doesn’t necessarily make the bank liable.
Under the UCC, the customer has one year from the date of the statement to notify the drawee bank about the issue, and if the customer misses the deadline, they are likely to be liable. However, even if the customer notifies the bank during the right time frame, the bank may escape liability if certain conditions exist.
Namely, the bank may not be liable if it can prove that it suffered losses due to the timeframe of notification. The code doesn’t elucidate the description of losses, and it doesn’t define promptly. However, many state courts have ruled that the bank may define these terms in its account holder agreements. To protect yourself, make sure that your agreements adequately address this issue in a way that is compliant with federal codes and state laws.
Additionally, in cases involving repeated wrongdoing by the same person, the customer must notify the bank within 14 days of receiving the statement. If they fail to do so, they will be liable, and they won’t be able to seek recovery.
However, the above exceptions don’t apply if the bank fails to exercise ordinary care when paying the item. For example, if a bank accepts a check that has been clearly altered, the bank is likely to be liable. On the other hand, customer negligence can also shift the burden of liability. Unfortunately, the UCC doesn’t list specific examples, but this may include something as simple as an account holder writing a check and leaving enough space for a thief to alter the check.
If your bank ends up being liable for the losses, you may be able to shift the burden to the depository (drawer) bank. They accepted the check and put it into the wrongdoer’s account, and it was their responsibility to warrant that the check was legitimate and not altered. However, they will only be liable if you make a breach of warranty claim in a reasonable time frame, and again, reasonable is subject to interpretation.
Forged Signature
Under the UCC, if the signature on the check is forged, the drawee bank is the most likely to be liable. They are the entity with the account holder’s signature, and thus, they have the knowledge to spot the issue. By accepting the check, they warranty its legitimacy. However, the depository bank must make a claim within a reasonable time period, or they may lose the chance to hold the other bank liable.
However, Clearing House Rule 9 allows the drawee bank to hold the depository bank liable for the forged check if they are both part of the same clearing house or if they both use clearing houses that have adopted this liability rule. For this rule to apply, the account holder must make a claim to their bank within 60 days after the check was deposited, and then, the bank must file a claim with the depository bank within 15 days. Otherwise, the depository bank can deny the warranty, and liability shifts back to the other bank.
Note that even if the account holder and bank make a claim within the specified time frame, the depository bank can deny the claim in the following situations 1) when the claim exceeds the funds on deposit in the account, 2) if the account is closed, or 3) if the depository bank wasn’t the first bank to which the check was transferred. If these conditions apply, the drawee bank will still be liable.
Forged Endorsement
The final situation is when someone forges an endorsement. This can happen when a thief steals a check from a payee, and then, forges the endorsement to cash the check. In this situation, the customer is generally only liable if they acted negligently or if they don’t alert the bank within three years of the date the bank statement was available to them.
The terms of customer negligence can vary. If the customer simply signs a blank check, they are liable if someone gets ahold of the check and cashes it. However, in that case, it’s not necessarily a forged endorsement depending on what name the thief put in the payee field. Many other situations may also constitute liability.
If the customer is not liable, the depository bank is usually liable to the drawee bank. This is because the depository bank should have taken precautions to spot the forged endorsement. Often, this comes into play when dealing with checks cashed over the counter using a fake ID, but it can also apply when someone takes over the payee’s account, deposits a check with a forged endorsement, and then withdraws the funds.
Bottom Line on Liability for Fraudulent Checks
Although the laws are convoluted and subjective, the bottom line is generally that the person who was in the best position to prevent the loss is liable.
For instance, if an account holder leaves their checkbook in a place where it’s very likely to get stolen, they may be liable. If a depository bank cashes a check that has been clearly altered, they may be liable. If the drawee bank doesn’t notice that the signature on the check doesn’t match the signature on file, they may be liable. Of course, as outlined above, there are exceptions to these rules.
FAQs About Check Fraud Liability
Check out these answers to some of the most commonly asked questions about liability issues in check fraud cases.
Are bank customers liable for forged checks?
A bank customer is typically not liable for forged checks, but in most cases, they need to prove that they were a victim of fraud. If the fraud happened due to their negligence, they can be held liable for the losses.
Who is liable for a forged check?
Generally, the drawee bank that pays the forged check is liable for the losses. However, as explained above, there are exceptions to this rule.
Who is liable for fake checks?
If an account holder deposits a fake check into their account, they are liable. However, if they can find the person who gave them the fake check, they can bring legal charges against that person to hold them liable.
Do banks have to refund customers for stolen money?
Banks are often liable for losses due to check fraud. However, banks are not liable in situations where the losses were caused by the account holder’s negligence.
How long do customers have to report altered checks?
Customers have one year from the date the check was cashed to notify the bank that it was altered. However, banks may be able to shorten the time frame if they can prove that they suffered certain losses as a result of the deal.
Reduce Check Fraud Now – Contact Us Today
The best way to avoid liability and reduce losses is to have tools in place that reduce your risk of check fraud. At SQN Banking Systems, we offer services and solutions that can help your bank spot altered checks and forged signatures as well as other anti-fraud solutions. To learn more or to set up a free fraud process review, contact us today.