AN EXPERT LOOKS @ CHECK FRAUD

Article published by The Norton Group, Consulting Firm, locates Princenton, NJ. said

Check fraud and forgery are two of the biggest security problems faced by banks. In fact, according to a recent Ernst & Young study reported by the National Check Fraud Center, over 500 million checks are forged annually, with losses totaling more than $12 billion, not counting those incurred by other types of document forgery.

Check fraud law is governed by Articles 3 and 4 of the Uniform Commercial Code (UCC). As a result, check fraud law has moved toward reflecting contemporary banking practices.

This memorandum generally addresses check fraud litigation resulting from: (i) alterations to the check, (ii) forgeries of the maker's signature on either the face of the check or the payee's endorsement on the back of the check, or (iii) counterfeit checks created by a dishonest third party. If there is a policy implicit in the UCC's rules for allocation of losses due to fraud, it surely is that the loss be placed on the party in the best position to prevent it.


The revisions to the law will likely result in three significant changes to the causes of action available in check fraud litigation. First, they may provide a new cause of action for contribution based solely on shared culpability. Second, they may expand conversion as a cause of action in check fraud cases. Third, they allow a drawee bank to recover from upstream banks for encoding errors that may result in shifting liability in some counterfeit check cases.

However, the bottom line from these developments is that employers and businesses are now likely to be responsible for part of the loss incurred in check fraud cases.

They should be put on notice that they need to implement policies under which (1.) banks they deal with are kept current on who is authorized to issue and sign checks, (2.) limit the number of people so authorized and (3.) adequately review canceled checks and statements as quickly as possible after they are received, to ensure they have been properly issued and paid.



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