A lot of banks allow people to deposit checks without endorsing them. When someone deposits a check into their own account, there is an implied “for deposit only” endorsement. But what happens when someone steals a check and forges the endorsement so they can cash it?
This can leave banks liable for losses, and to protect yourself, you need to understand the rules.
What Is a Forged Endorsement?
A forged endorsement is when someone forges the payee’s name in the endorsement section on the back of a check. They may forge the endorsement and use a fake ID to cash a check from the payee’s account at the bank or at a check-cashing facility. Alternatively, they may forge the endorsement, sign their own name, and deposit the check into their own account.
Who Is Liable for Forged Endorsements?
Liability for forged endorsements depends on the situation and the timing. Generally, the depository bank is liable, but if the paying bank (drawee) doesn’t return the check by midnight on the day of the deposit, the paying bank may be liable.
Who’s Liable When There’s No Endorsement?
The rules are different if there’s no endorsement. When there’s no endorsement, the drawee bank must rely on the presentment warrant of the depository bank. In other words, the drawee bank should assume that the depository bank verified the identity of the payee when they deposited the check.
In the digital world, this often means that the payee opened an app on their phone and took a photo of the check to deposit it. If the drawee bank gets a complaint about a forged endorsement from their account holder, they can hold the depository bank liable. This is a breach of the presentment warranty.
Forged Endorsement Vs. Blank Check
A forged endorsement can only happen if someone forges the payee’s name. If an account holder signs a blank check and someone makes it out to themselves, that is not the same as a forged endorsement. In this case, the customer is almost always liable. If an account holder contacts you about this type of issue, advise them to put a stop payment on the check.
Forged Endorsement on a Joint Check
A joint check can be payable to both parties or to either party. If the check says “and” or uses an ampersand between the names, it must be endorsed by both parties. In contrast, if it has an “or” between the names, it only needs to be endorsed by one party
Whether you’re the drawee bank or the depository bank, you should pay close attention to this distinction. If you inadvertently accept a check for a deposit that has one correct signature and one forged signature, you may end up being liable for the losses.
In particular, this issue tends to come up with divorced couples. To give you an example, imagine that a couple divorces and then an insurance company sends them a joint check or they receive a joint check from a tax refund. If just one person takes the check and forges the other person’s name, the victim may file a claim and hold your financial institution responsible for their losses.
Statute of Limitations on Claims for Forged Endorsements
The Statute of limitations for a forged endorsement is three years under the UCC rules. This means that victims must bring claims forward within this time period to make a claim. Banks are not liable for forged endorsements after the statute of limitations expires.
However, states may shorten this time period. To protect yourself, you need to understand the rules in your state.
Banks Must Balance Safety and the Customer Experience
Banking customers know about endorsement lines. They see the warning on your banking app that says to write “for mobile deposit” only on the endorsement line. However, if you are not currently enforcing these rules, it can be very disruptive for customers if you suddenly start enforcing these rules.
If someone is used to being able to deposit checks without endorsing them or writing anything in the endorsement area, they will be frustrated and upset if their deposit is rejected. When creating a policy to reduce forged endorsements, keep that in mind.
Be very proactive about communicating changes, and whenever possible, don’t introduce changes that disrupt the customer experience. Also keep in mind that while customers want a streamlined deposit process, they also don’t want to become the victim of a scam.
They don’t want someone to be able to cash a check with a forged endorsement from their account. To this end, you may want to have stronger measures in the teller line than you do for mobile deposits.
When you’re dealing with a mobile deposit, you’ve likely authenticated the depositor’s identity by their password, IP address, and device. You may have also used dual-factor authentication. At the teller line, you’re relying on a teller to visually verify their identity from a photo ID. That is a risky and error-prone process, and to protect yourself, you may want to pay special attention to these endorsements.
You may also want to ban third-party endorsements unless the original payee is at the bank with a photo ID. A third-party endorsement is when the payee endorses the check so that another person can cash it or deposit it. You have no way to tell if the endorsement is forged unless the signer is there to verify their identity.
Ultimately, regardless of the policies you decide to embrace, remember that you need to strike a careful balance between customer safety and banking convenience.
How to Spot a Forged Endorsement
Spotting a forged endorsement with the naked eye can be very difficult, especially if it’s a skilled forgery. If someone traces the real signature or practices creating a realistic forgery, your tellers will probably not be able to tell the difference between the forgery and the real signature. Even a trained signature analyst can have trouble with a good forgery.
Signature verification software can be critical if you want to spot forged endorsements. They look at the static elements of a signature such as shapes and angles, but they also consider dynamic elements such as stroke speed and fluidity. Using this data, these tools alert your team of suspected forged endorsements or other forgeries. Then, your team can decide the next steps forward.
Check fraud is a significant concern for financial institutions, and it takes many different forms including forged endorsements. To protect your financial institution, you need signature verification tools and other solutions to help you fight against check fraud. To learn more, contact us today at SQN Banking Systems.