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DATCU Warns of Fraud; Compliance Q&A on Counterfeit Checks
Monday, June 4, 2018 7:00 AM

DATCU Credit Union Compliance Officer Billy Brothers reports that credit union staff has been seeing another round of counterfeit cashier's checks, which look like they've been drawn from the credit union. The amounts vary from $1,000 to $5,000.

View a copy of one of the fraudulent checks. 

"The major indicator is the signature of the authorized signer," says Brothers. "We do not have an employee with the name of Rick. Also, we have no employees with the last name starting with Z."

DATCU continues to gather more information and will share it as news warrants.

In response to this report, Cornerstone's Regulatory Compliance Advisor Nathan Behncke provided a Q&A in Friday's InfoSight Newsletter, and we think it's important to impart the information to our broader audience. Please take note to help alert your own staff about counterfeit checks so that future losses can be avoided.

Q:  In the case that the credit union is presented with a completely counterfeit check for payment, on whom does the liability fall?

A:  Counterfeit checks are an interesting item, in that presentment and transfer warranties apply to altered checks and not to ones that are created out of whole cloth. Generally speaking, UCC check law places the liability on the party that would be most likely to spot the forged item. On altered checks, this might mean that a depository institution bears some liability for failing to identify a forged endorsement. When the check is completely counterfeit, the signature may actually be authentic for that depositing individual, meaning the only party in the check chain that would know the item is potentially counterfeit is the drawee bank responsible for the ultimate payment of the item. 

Therefore, if someone fabricates a check for one of your members, the liability would fall on the credit union to catch that error. That return must occur (per UCC), before the credit union has made “final settlement” and before midnight of the banking day following presentment, known as the “midnight deadline.”  This means that your credit union only has a short period to detect a counterfeit item.

Since many checks are processed electronically, it is likely that many low-dollar amount counterfeit checks will pass through and cause a loss to the credit union or one of your members. The credit union may set a threshold for the risk it is willing to take and set a rule to pull checks over a certain amount for a manual inspection. This may not prevent all losses, but it will stop a counterfeiter from passing items of a large amount. The credit union may also determine other factors that may trigger a manual inspection.

Now, if the check is one of the credit union’s own teller’s or cashier’s checks, the liability remains the same. If the credit union does not dishonor the item upon presentment for payment, it will lose the right to refuse, despite the fraud. Again, sound controls should screen for these items, and on the credit union’s own checks, it might be prudent to have a lower threshold for a manual inspection.

In other cases, where a member deposits a check that is counterfeit drawn on another institution, the credit union always has recourse against that member. The credit union may employ any Regulation CC protection holds for these items if there is suspicion that the item is not authentic, or they may simply refuse it for deposit.