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Chief Executive Officers and Compliance Officers of All National Banks, Department and Division Heads, and All Examining Personnel
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This bulletin discusses factual and legal issues related to fraudulent cashier’s checks, including associated risks for depositary banks, and provides recommendations to national banks for managing these risks and protecting their customers. This guidance also generally applies to other official instruments, such as official checks and money orders.
Bank customers often deposit cashier’s checks they receive from persons with whom they conduct business, including selling goods or services over the Internet. In some cases involving fraudulent cashier’s checks, the customers are asked to wire other funds to third parties by the persons who sent the cashier’s checks. When it becomes clear that the checks are fraudulent, many of those customers may seek redress from the bank at which they deposited the check. Situations involving fraudulent cashier’s checks can expose a bank to reputation and other risks, as well as risk of loss to their customers.
Although this bulletin primarily addresses the risks posed to depositary banks by fraudulent cashier’s checks, paying banks should also be aware that fraudulent instruments pose risks to them.1
BACKGROUND
Factual Scenarios
The OCC has become aware of an increasing number of consumer complaints relating to fraudulent cashier’s checks. These complaints generally fall into one of the following factual scenarios:
- Selling goods. The consumer sells goods in the marketplace, for example, over the Internet. A buyer sends the consumer a cashier’s check for the agreed-upon price, and the consumer ships the goods to the buyer
.
- Excess of purchase price. This pattern is similar to
the one described above. However, the buyer sends
the consumer a cashier's check for more than the
purchase price and asks the consumer to wire the
excess to a third party, often in a foreign country.
- Unexpected windfall. The consumer receives a letter
stating that the consumer has the right to receive a
substantial sum of money. For example, the letter
may state that the consumer has won a foreign
lottery or is the beneficiary of someone's estate.
The letter will explain that the consumer must pay a
processing/transfer tax or fee before receiving the
money, but a cashier's check will be enclosed to
cover that fee. The letter will ask the consumer to
deposit the check into a deposit account and wire
the fee to a third party, usually in a foreign
country.
- Mystery shopping. The consumer receives a letter
stating that he or she has been chosen to act as
a mystery shopper. The letter includes a cashier's
check, and the consumer is told to deposit the check
into his or her account. The consumer is told to use
a portion of these funds to purchase merchandise at
designated merchants and to transfer the remainder of
the funds to a third party using a designated wire
service company.
- Money Transfer Agent. The consumer is solicited to
act as a money transfer agent. The consumer is told
that he or she will receive cashier's checks to
deposit into his or her bank account. The consumer
is then told to wire specific sums to various persons
or accounts in other countries.
In each of the scenarios, the consumer believes that the
cashier's check is valid and deposits the check into a
deposit account. After the depositary bank makes the
funds available to the consumer, the consumer sends
goods or, where requested, funds to the third party.
Some time later, the check is returned unpaid by the
paying bank because the check is discovered to be
fraudulent. The depositary bank then reverses the
credit to the consumer's account. As a result of this
check fraud, the consumer suffers a loss of the goods
sold, the funds wired, or both.
It can be very difficult to detect fraudulent cashier's
checks in these scenarios. Fraud perpetrators may
employ various devices to delay or make more difficult
the detection of the fraud. For example, the check may
be drawn on a bank located in a different check
processing region than the region in which the depositor
is located. Fraud perpetrators also may take actions
to make the transaction look as genuine as possible,
such as using - and altering - a genuine check. Checks
may also list the name of one bank, but contain the
routing number for another bank. Similarly, the
perpetrator may deliberately make part of the check
illegible in order to ensure that the check must be
handled manually, slowing its processing time.
Legal Issues
With respect to the activities of national banks,
fraudulent cashier's checks raise two primary
legal issues: funds availability and the authority to
reverse a credit when a check is returned unpaid.
(1) Funds Availability. Funds availability is governed
by the Expedited Funds Availability Act, 12 USC 4001 et
seq., and Regulation CC promulgated by the Board of
Governors of the Federal Reserve System, 12 CFR 229.
Generally, a bank must make funds deposited by
government and cashier's checks available within one
business day after deposit, if certain requirements are
met.2 Otherwise, the bank must make local
cashier's checks (defined as checks payable by, at, or
through a bank located in the same check-processing
region as the location where the check was deposited)
available within two business days after deposit.
3 The bank must make nonlocal cashier's checks
available within five business days.4
Regulation CC contains several exceptions that allow
banks to delay making funds available. If a customer
deposits more than $5,000 in any one day, for example,
the bank may place a hold on the amount over $5,000.
5 For purposes of this exception, the bank may
aggregate all checks deposited into all accounts held
in the customer's name, either as sole or joint holder.
The bank also may delay making the funds available if it
has reasonable cause to believe that the check is
uncollectible from the paying bank.6 For
purposes of Regulation CC, there is reasonable cause if
facts exist that would cause a reasonable person to have
a well-grounded belief that the check is uncollectible.
However, the bank may not base its reasonable cause
determination on the fact that a check is of a
particular class or has been deposited by a particular
class of persons. Therefore, a bank may not, for
example, place a hold on all cashier's checks.
If the facts support imposing such a delay, the bank
may delay availability only for a reasonable period of
time.7 Regulation CC also provides a safe
harbor for determining a reasonable period of time for
this purpose: the bank generally may withhold funds for
a total of seven business days for local cashier's
checks, and for a total of 11 business days for nonlocal
cashier's checks.8 If the bank holds a check for
longer than the applicable safe harbor, the bank must
establish that the longer period is reasonable.
(2) Reversing the Deposit Credit. The Uniform
Commercial Code (UCC)9 addresses the ability of
a bank to charge back items returned to it, including
fraudulent cashier's checks. Depositary banks
generally may charge back to their customers the amount
of checks that are later returned by the paying bank.
10 In addition, a bank may provide in its
deposit agreement for the right to charge back any item
regardless of when the item is returned to it. The fact
that a depositary bank has made funds represented by the
returned item available to the depositor - even if the
depositor has made use of such funds - does not affect
the bank's right under the UCC or its deposit agreement
to charge back the item or otherwise obtain a refund
from its customer.11 Similarly, if a paying
bank mistakenly pays a fraudulent cashier's check, the
UCC generally allows the bank to recover the amount
paid.12
RISKS FOR DEPOSITARY BANKS
Customer deposits of fraudulent cashier's checks create
a number of risks for depositary banks. For a variety
of reasons, the customer may believe that the depositary
bank bears some responsibility for his or her loss. For
example, the customer may argue that the bank should not
have credited the account before the check cleared, or
should have followed different procedures in order to
detect the fraud. Alternatively, the customer may claim
that he or she was led to believe that the check had
cleared by statements made by a bank employee, such as,
that funds were available. The customer also may
believe that the bank should not have reversed the
credit after making the funds available.
This customer dissatisfaction would raise reputation
concerns for the bank. In addition to the immediate
customer relations impact, a bank could face broader
reputational risk, including from possible litigation
by the customer.
Depositary banks also may face credit risks in these
situations. Reversing the deposit may cause the
depositor's account to become overdrawn, and thereby
create what is, in effect, a loan to the depositor. In
that event, the customer may be unable - or unwilling -
to repay the overdraft.
Paying banks also experience risks related to fraudulent
cashier's checks. Paying banks that fail to identify
fraudulent cashier's checks may pay the checks
erroneously. Even if they identify the checks as
fraudulent, they may find themselves liable for the
amount of those checks if they do not return the checks
in a timely manner.
RECOMMENDATIONS
National banks should take actions to address the risks
to the bank and its customers posed by fraudulent
cashier's check schemes:
- Depositary banks should have appropriate procedures
for processing and cashing cashier's checks that
include methods of identifying potentially suspicious
items and criteria for placing holds on deposits.13
- Depositary banks should consider training or other
steps to ensure that relevant personnel are aware of
the increasing incidence of fraudulent cashier's
checks. At a minimum, bank employees who handle
deposits should be aware of the bank's procedures for
identifying and handling suspicious cashier's checks.
In addition, bank tellers could be trained to examine
large-dollar checks more closely to identify
suspicious cashier's checks, and to ask appropriate
questions when customers deposit such cashier's
checks.
- Depositary banks should review their deposit
agreements to ensure that the agreements
appropriately address returned items and mitigate the
risks related to fraudulent cashier's checks.
- Depositary banks should be aware of the need to
explain the status of deposits to its customers
clearly and accurately, particularly in light of the
potential for customer confusion. For example,
without such information, customers may conclude that
a check has cleared solely because the funds are
available in the depositor's account. Tellers and
other relevant personnel should receive appropriate
training or other information to accomplish these
objectives.
- Depositary banks should consider methods of working
cooperatively with deposit customers that become
victims of cashier's check fraud. In addition to
providing assistance to the customer in connection
with their claims or other actions against
perpetrators, it may be appropriate in some
circumstances to convert a resulting overdraft into a
more formal loan that the customer can repay over
time, instead of demanding that the overdraft be
repaid immediately.
The OCC issues periodic Alerts, as necessary, to provide
information about counterfeit and stolen financial
instruments, including cashier's checks, reported by
national banks. OCC Alert 2006-58, issued on
October 25, 2006, contains a list of Alerts concerning
counterfeit and stolen instruments. More recent Alerts
concerning counterfeit and stolen instruments are
located on the OCC's Web site at
http://www.occ.treas.gov/fraudresources.htm. National
banks that become aware of counterfeit or stolen
financial instruments are encouraged to notify the OCC's
Special Supervision Division by e-mail at
occalertresponses@occ.treas.gov or telephone at
(202) 874-4450, and are required to notify law
enforcement of certain suspected violations of law and
suspicious transactions by filing a Suspicious Activity
Report pursuant to 12 CFR 21.11.
Questions regarding this bulletin can be directed to the
Special Supervision Division at (202) 874-4450, the
Compliance Policy Department at (202) 874-4428, or the
Community and Consumer Law Division at (202) 874-5750.
/signed/
Ann F. Jaedicke
Deputy Comptroller for Compliance Policy
/signed/
Michael S. Bylsma
Director for Community and Consumer Law
Footnotes--
1) In addition, depositary banks should be aware that
those risks can arise in the case of "on-us" items
that purport to be drawn on the same bank into which
they are deposited.
2) 12 CFR 229.10(c).
3) 12 CFR 229.12(b).
4) 12 CFR 229.12(c).
5) 12 CFR 229.13(b).
6) 12 CFR 229.13(e).
7) 12 CFR 229.13(h)(1).
8) 12 CFR 229.13(h)(2) and (4).
9) The UCC is a model law, different versions of which
have been adopted by state legislatures. State
enactments may differ from the model law.
10) Id. at section 4-214(a). The bank's right to
charge back under the UCC may not apply if the
paying bank fails to return an item to the bank by
midnight of the banking day following the date the
paying bank received the item.
11) Id. at section 4-214(d)(1).
12) Id. at section 3-418(a), (b).
13) Banks should be advised, however, that these
procedures must comply with all applicable laws.
For example, as noted above, because Regulation CC
expressly prohibits basing doubts concerning
collectibility on the fact that a check is of a
particular class, national banks cannot institute a
policy of placing holds on all cashier's checks.
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