Fighting Fraud: Counterfeit Checks

Amy Donaghue

By: Karen Sylvester, AAP, APRP, CAMS, CRCM, NCP, Senior Director, Compliance Education

If you’ve ever attended one of my training sessions, I may have shared that when I started at a financial institution one of my responsibilities was manually filing checks that had cleared our account holders’ accounts. During that process, I compared the signatures of those checks, as well as the check stock on which they were written. On multiple occasions, this resulted in noticing something was “off.” We then contacted the account holder to confirm whether or not the checks were legitimate.

As technology has been enhanced over the years and more items moved to an electronic format, most financial institutions got away from this practice. Unfortunately, the fraudsters have figured out our lack of attention to these details and are returning to their old methods of check fraud in hopes that the paying back and account holder will not notice these items in a timely fashion.

The EPCOR Member Support team receives calls almost daily from paying financial institutions asking what their rights are regarding fraudulent check items posting to their account holders’ accounts. The answer tends to surprise our members. Here are a few helpful hints to navigate the process:

Counterfeit check – The paying financial institution holds the warranty for counterfeit checks. The paying financial institution is responsible for monitoring checks and the signatures on checks. If the item is processed through the Federal Reserve, there is no recourse with the depositary financial institution. If the item is processed under the ECCHO rules the paying financial institution is still responsible, but they may file a Rule 9 claim to attempt recovery of all, or some, of the funds.

Altered check – If the item is washed or altered, such as altering the dollar amount, the depository financial institution holds that warranty for that item. If the item is processed under the Federal Reserve or ECCHO rules, the paying financial institution must deal directly with the depositary financial institution if the item is not detected and returned within 24 hours of presentment.

Please note, organizations should use the correct return reason code to return the item through the respective system your institution utilizes. The “Refer to Maker” code should not be used in the case of a counterfeit or altered item, as this does not give the depository financial institution a clear picture as to why the item is being returned.

Though your business account holders have a responsibility to check their accounts, as their financial institution you are their first line of defense. Implementing a positive pay system may make this account monitoring task less daunting.

Want to learn more about business check fraud schemes happening in the EPCOR region? Join us for our upcoming Quarterly Compliance and Fraud Review on November 10. Register now!