National Check Fraud Center

Check Fraud-Who is Liable

Current UCC Codes outline specific check fraud responsibilities for banks and corporations. Court decisions have already established guidelines for legal responsibilities, and failure to meet these guidelines can cause a bank or company to experience financial loss.

UCC Revisions now define responsibilities for check issuers and paying banks under the term ordinary care. Under Sections 3-403(a) and 4-401(a), a bank can charge items against a customer's account only if they are "properly payable" and the check is signed by an authorized individual. However, if a signature is forged, the corporate account may be liable if one of the following exceptions applies:

  • According to UCC Section 3-103(7), ordinary care requires account holders to follow "reasonable commercial standards" prevailing in the area for their industry or business. Under 3-406, if they fail to exercise ordinary care, they may be restricted from seeking restitution from the payee bank if their own failures contributed to a forged check signature or an alteration - (for example, raising a check amount from $50 to $5000).

  • Section 4-406 also requires customers to reconcile their bank statements within a reasonable time to detect unauthorized checks. This typically means reconciling statements as soon as they are received.

  • The concept of comparative fault - Sections 3-406(b) and 4-406(e) - can shift liability to the check issuer. If both the bank and corporate account holder have failed to exercise ordinary care, a loss can be allocated based upon the extent that each party's failure contributed to the loss. Since banks are not required to physically examine every check, companies may be held liable for all or a substantial portion of any given loss - even if the bank did not verify the signature on a fraudulent check.

  • Liability for counterfeits that are virtually identical to originals will be examined on a case-by-case basis. The process used when issuing the check will be reviewed to determine if the company exercised ordinary care or contributed to the loss.

Impact of Regulation CC

In 1992, the Federal Reserve Regulation CC reduced the time a bank was allowed to hold deposited funds as uncollected items. The new regulations provides access to funds in a shorter period of time- e.g., local checks within 2 days, non-local checks within 5 days - regardless of the actual check has cleared.

The regulation's intent was to speed the availability of funds. But the change has greatly increased fraud losses by shortening the time that banks have to return items paying against uncollected funds. In most cases, it increases the time criminals have to perpetrate a fraud. This is done by manipulating a checks routing and transit numbers, redirecting checks to an incorrect Federal District.

Banks are also required to follow stricter guidelines regarding new accounts. Any account that has been open for 30 days may no longer be considered a new account. This guideline, as with Reg CC, provides criminals with additional time to defraud banks via altered or bogus checks.

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