National Check Fraud Center

Depository Law
One of the best-kept secrets in the Banking industry

BY:
Charles M. Bruce
Director

Police officials view check fraud as a "white collar crime", often going unprosecuted or resulting in either probation or a light jail sentence due to outdated state laws. Majority of the check fraud being conducted today is by organized gangs. But with the use of computers and scanners, the average person is now getting involved due to its simplicity of counterfeiting a stolen check. It has been reported that many of these gangs are involved in more serious crimes such as money laundering, drugs, and prostitution to name just a few. When an individual becomes involved it has been reported that he does to support a drug problem or to get out of debt. Check Fraud actually funds those criminal activities.

Your Stolen Check(s) may become a personal financial liability should you fail to follow the statues and current state laws.

Under Regulation CC, laws were introduced to accelerate check deposit availability. Banks are required to make funds available within two days for local checks and five days for out-of-town checks. These regulations, coupled with competitive pressures, have forced banks to make funds available for check writing BEFORE previous deposits have actually been cleared.

Depository Law
has been
"one of the best-kept secrets in the banking industry."

Recent changes in the Uniform Commercial Code have shifted the liability of forged checks off the banks and onto account holders. These new laws stress "due diligence" and "comparative negligence", where parties split check fraud liability and monetary losses based upon the respective levels of fault.

U.C.C. - ARTICLE 4 - BANK DEPOSITS AND COLLECTIONS
PART 4. RELATIONSHIP BETWEEN PAYOR BANK AND ITS CUSTOMER

4-406. CUSTOMER'S DUTY TO DISCOVER AND REPORT UNAUTHORIZED SIGNATURE OR ALTERATION.

  1. A bank that sends or makes available to a customer a statement of account showing payment of items for the account shall either return or make available to the customer the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paid. The statement of account provides sufficient information if the item is described by item number, amount, and date of payment.
  2. If the items are not returned to the customer, the person retaining the items shall either retain the items or, if the items are destroyed, maintain the capacity to furnish legible copies of the items until the expiration of seven years after receipt of the items. A customer may request an item from the bank that paid the item, and that bank must provide in a reasonable time either the item or, if the item has been destroyed or is not otherwise obtainable, a legible copy of the item.
  3. If a bank sends or makes available a statement of account or items pursuant to subsection (a), the customer must exercise reasonable promptness in examining the statement or the items to determine whether any payment was not authorized because of an alteration of an item or because a purported signature by or on behalf of the customer was not authorized. If, based on the statement or items provided, the customer should reasonably have discovered the unauthorized payment, the customer must promptly notify the bank of the relevant facts.
  4. If the bank proves that the customer failed, with respect to an item, to comply with the duties imposed on the customer by subsection (c) the customer is precluded from asserting against the bank:
    1. the customer's unauthorized signature or any alteration on the item, if the bank also proves that it suffered a loss by reason of the failure; and
    2. the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer of the unauthorized signature or alteration and after the customer had been afforded a reasonable period of time, not exceeding 30 days, in which to examine the item or statement of account and notify the bank.

  5. If subsection (d) applies and the customer proves that the bank failed to exercise ordinary care in paying the item and that the failure substantially contributed to loss, the loss is allocated between the customer precluded and the bank asserting the preclusion according to the extent to which the failure of the customer to comply with subsection (c) and the failure of the bank to exercise ordinary care contributed to the loss. If the customer proves that the bank did not pay the item in good faith, the preclusion under subsection (d) does not apply.
  6. Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer's unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section 4-208 with respect to the unauthorized signature or alteration to which the preclusion applies.

It is the depositor's common law duty to examine drafts and statements furnished by the bank and report alterations or forgeries within a reasonable time.

(National Sur. Co. v Manhattan Co., 252 NY 247, 256, rearg denied 252 NY 616; Critten v Chemical Nat. Bank, 171 NY 219, 227-228;)

Banks may assert a defense under UCC 4-406(4), which provides that "without regard to care or lack of care of either the customer or the bank a customer who does not within one year from the time the statement and items are made available to the customer (subsection [1]) discover and report his unauthorized signature * * * is precluded from asserting against the bank such unauthorized signature" (UCC 4-406[4])


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