Fraudulent business checks and financial institution official checks are being issued at unprecedented rates. The most common scam involves members receiving a letter indicating that they have won a lottery. The member is asked to wire or send the company part of the amount of the purported official check. The member is then directed to retain the remainder of the proceeds as their winnings. This is only one of hundreds of scenarios currently occurring across the United States.
Your credit union has probably been faced with these checks many times before. Most credit unions are not aware that it is a problem until the checks are returned as fraudulent.
Scam artists attempt to make their fraudulent checks more credible by using the term “official check.” This type of check is not defined in the Uniform Commercial Code. Any check that is issued by a financial institution must be guaranteed funds, however, when a fraudulently created item is issued purporting to be drawn on a financial institution that check is not payable. Most of the official check fraud is attempted using fraudulently created checks that copy the financial institution routing number (allowing the perpetrator additional time to escape the fraud while the check is attempting to clear) and use a fictitious account number.
There are some proactive steps that your credit union can take to mitigate your loss or protect from it altogether:
- Call the financial institution the check is drawn on to verify funds. However, there is no guarantee the funds will be there or that a stop payment will not be in place by the time the check is received at the paying financial institution. This might be an initial step to determine if fraud was occurring.
- If you doubt collectibility you may refuse to accept the item. No law requires your credit union to accept any item that you have reason to doubt will be paid.
- Send the check for collection. The item is accepted, a receipt for collection is issued, and the item is sent to the paying bank for payment. Your member receives credit for the item once your credit union receives the payment from the paying financial institution. This process may take up to 30 days.
- Place the maximum allowable hold on the item as permitted by Regulation CC – The Funds Availability Act.
Regulation CC contains several exceptions that allow financial institutions to delay making funds available. A credit union also may delay making the funds available if it has reasonable cause to believe that the check is uncollectible from the paying bank. For purposes of Regulation CC, there is reasonable cause if there is information that would cause a reasonable person to have a well-grounded belief that the check is uncollectible. However, the credit union 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 credit union may not, for example, place a hold on all tax refund checks.
If the facts support imposing such a delay, the credit union may delay availability only for a reasonable period of time. Regulation CC also provides a safe harbor for determining a reasonable time for this purpose: the credit union generally may withhold funds for a total of seven business days for local cashier’s checks, and a total of 11 business days for non-local cashier’s checks. If the credit union holds a check for longer than the applicable safe harbor, the credit union must establish that the longer period is reasonable.