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A Matter Of Forgery

Jeff owed Peter $400.

He had owed it to him for over a year, as a matter of fact.

One day Peter asked Jeff when he was going to pay his money back and Jeff said, "What are you talking about? I mailed you a check for $400 over six months ago!"

Peter looked at him in astonishment and said, "I never got it!"

When Jeff found out that Peter had never received the check, he went home and started going through his checking account statements.

Sure enough, there was the check in his statement-with Peter's name on the back of it, right above the name of the place where it had been cashed-the Eat-Good Supermarket.

Jeff took the check to Peter and showed it to him.

Peter agreed it was his name on the back of the check, but he said it wasn't his handwriting and it had not been endorsed by him. He said, "I've never even seen this check before, and I've never been in the Eat-Good Supermarket!"

Jeff took the check back to his financial institution and told them what had happened.

They gave him an affidavit of forgery to be signed by Peter. This affidavit says that Peter did not endorse the check, had received no value from it, and did not have any knowledge of the check's negotiation.

Peter signed the affidavit, had it notarized, and gave it to Jeff, who returned it to the banking officer at his financial institution.

The banking officer, after investigation, credited Jeff's account.

Jeff then paid Peter the $400, and both Jeff and Peter were happy with the outcome.

The banking officer was not. It had cost Jeff's financial institution $400, and they wanted their money back.

There were three endorsements on the back of the check. The first was the forgery of Peter's name, and the second was the Eat-Good Supermarket, which had cashed the check. Eat-Good had then deposited the check into their account at the A-OK Bank. The third endorsement, then, was the A-OK Bank.

The banking officer wrote to the A-OK Bank, sending along the original check and the affidavit of forged endorsement to them through the mail, requesting reimbursement of the $400.

This is called returning the check "Without Entry." It did not go back to the A-OK Bank through the exchange, but through the United States mail.

Under Uniform Commercial Code (U.C.C.), which governs all financial institutions, the institution that accepts the check for deposit (the depositary institution-in this case the A-OK Bank) guarantees all prior endorsements. On this particular check, that would include Peter's endorsement. A-OK guaranteed Jeff that Peter's endorsement was genuine. Like all good "guarantees", it is a "money-back guarantee."

So when the A-OK Bank got back the check with the affidavit saying that Peter's endorsement was forged, they had to pay back Jeff's financial institution the $400.

Which they did.

Now Jeff's institution was happy.

But A-OK, the depositary bank, was not.

A-OK looked on the back of the check and found that their customer, Eat-Good Supermarket, had deposited the check into their account. So the bank charged the supermarket's account for the $400, and sent the check and the original affidavit to them.

In this situation, as you can see, the supermarket is out the $400-not the A-OK Bank.

It doesn't always work out that way.

According to U.C.C., Jeff and Peter have three years from the date of endorsement to make a claim on the check.

Very often the account that the check was deposited into is closed by the time the check gets back without entry, and there is no way for the depositary institution to recover their money. In this case, if the supermarket's account had been closed, the A-OK Bank would have suffered the loss, because there would be no place to charge back the check.

By the same token, if the check had been cashed by a teller at the A-OK Bank instead of being deposited, the loss would be by A-OK unless the teller could remember for whom the check was cashed, and was able to get the money back from that person.

If, instead of this being a personal check of Jeff's to Peter, it had been a U.S.Government check, a slightly different method of recovery is used in cases of forged endorsement.

The U.S. Treasury issues millions of checks each month-not counting Internal Revenue Checks. They might be Social Security checks, S.S.Annuity checks, Armed Forces Payroll, etc.

The time frame for claims is different from that for personal checks. The Competitive Equality Banking Act, which is a law, stipulates that the government will accept claims up to a year and a half after negotiation. (It's three years on personal checks, payroll checks, etc., according to Uniform Commercial Code. Government checks only have the limit of one and one half years.)

If the U.S. Treasury gets a claim of non-receipt from a payee on one of these checks, and the check has been paid out, the government office makes a copy of the front and back of the paid out check from their file.

They take an affidavit from the payee, and send the affidavit and the copy of the check to the depositary institution.

The big difference is that they do not send it "Without Entry" with a request for reimbursement, as financial institutions do with each other.

They send it with a charge to the institution and a little notice that says, "We have charged your account".

This means that Treasury has already paid itself back out of the institution's money, through the Federal Reserve Bank, by putting through their own charge to the financial institution. How often does this happen? Senator Christopher Bond (R-Mo) noted, "Last year the Department of the Treasury reclaimed $68 million for government checks which had been honored with forged or improper endorsements."

In the last issue we ran an article on "Mandatory Check Cashing".

If the proposed law passes, it will mean that your institution MUST cash U.S. Government checks for people, even if they are not your depositors.

If you cash a check for someone you do not know, who does not have an account with you, and a year from now your institution gets that check back from the U.S.Treasury with a little form that says, "We have charged your account . . .", will you be able to get the money back from the person for whom you cashed it?

Be sure you ask for identification-and record it on the back of the check. If you are not comfortable with the ID shown you, ask for more!

Ask the person if they would like to open an account. The rule of KNOW YOUR CUSTOMER has never been more important.

The financial institutions in this country last year lost less than $43 million in cash in armed robberies.

But remember, according to Senator Bond, these same institutions lost $68,000,000 JUST IN FORGED GOVERNMENT CHECKS! That figure does not include losses from personal and business checks!

Ask for-and verify-identification! Know your customer!

One of the favorite tricks used by criminal forgers to obtain checks was for a couple to go into a business establishment and while one of them lured away the owner/bookkeeper from the desk, the other, left alone in the office, would remove several pages of checks from the back of the checkbook, where they would not be noticed.

Most of us have a desk or some workplace at home where we keep our checks. Criminals posing as rug layers/cleaners, carpenters, nurses, house cleaners, etc. would pull the same scam in the home. Locating the checkbook, they would pull checks out of the back, where they wouldn't be missed, carefully returning the checkbook where it belonged.

Now, with the use of the computer and the new technology using laser printers, it's easier than ever for criminals to forge documents and checks.

They no longer need pages of checks-only one check. Even a used one from the trash will do, as a computer can very effectively erase any writing from it before "making" new checks on the laser printer. When you are opening accounts for new customers, either personal or business, stress that checks should always be kept in a secure location. (Glove compartments are NOT secure.) If they throw checks away, be sure they are torn up or shredded before being put in the trash.

It wouldn't hurt to remind your established customers of this scam too-it's all part of your "super customer service!"

Excerpted from the U.S. UNIFORM COMMERCIAL CODE Bank Deposits and Collections Title 13, Section 4-406
Duty of customer to discover and report unauthorized signature or alteration.

(a) General rule.-When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.
(b) .......
(c) .......
(d) Statutes of limitations applicable to customer.-Without regard to care of lack of care of either the customer or the bank a customer who does not within one year from the time the statement and items are made available to the customer (subsection (a) discover and report his unauthorized signature or any alteration on the face or back of the item or does not within three years from that time discover and report any unauthorized indorsement is precluded from asserting against the bank such unauthorized signature or indorsement or such alteration.

Editor's note-the bankers have always said Endorsement-but the U.S. Government insists it's an Indorsement!

Copyright © 1990 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 1, No. 7, 7/90

First published on 07/01/1990

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