Have a client that had a depositor try to deposit a fraudulent check into her account. Can a bank close a deposit account at its own discretion due to fraudulent activity by the depositor? And what are the procedures for doing so (i.e. customer notification and timeline, how to document)? I know you can have customers close their accounts due to others fraudulently using their account to protect against further loss, but this isa little different in that the customer is the one doing the fraudulent activity.

Look at the language in the signature card the customer signed. If it's of recent vintage, it should say that your bank has the right to unilaterally close the account. Cite that language in your letter. You are not required to give a reason, but if you do it in close proximity to the attempt to deposit a fraudulent item they should be able to connect the dots.

If the account is receiving federal benefit payments, you are required to give 30 days advance notice. If payroll or any other periodic payment is coming into the account, I encourage you to give notice equal to the intervals between deposits; e.g. if they are paid every two weeks, give them two weeks notice.

Tell them the only over the counter deposits you will accept will be cash and that they should only deposit enough to cover outstanding checks they have already written.

By the way, congratulations. There are a lot of folks who would wait until they actually lost money before it would have occurred to them to close the account.

The requirement to allow 30 days when an account is receiving Federal Benefits Payments has an exception in the event of fraud. But if you close such an account with less than 30 days' notice, you have to arrange with the beneficiary for him/her to get the next benefit payment.

Here's the excerpt from the Green Book:

Termination by the Financial Institution
Financial institutions may close an account to which benefit payments are currently being sent thereby revoking the enrollment authorization by providing a 30-day written notice to the recipient prior to closing the account. In cases involving fraud, accounts may be closed immediately. The financial institution cannot revoke the enrollment authorization by notifying the Federal agency and not the recipient.

The 30-day written notice should remind the recipient to make other arrangements for the handling of his / her payments. The financial institution must credit to the recipient’s account any payments received during the 30-day notice period. The financial institution must also immediately return to the Federal government all payments received after the 30-day notice period. A financial institution that closes the account without properly termination (sic) the enrollment must make the funds available to the recipient until proper notice is provided.

If there is no recurring federal benefit payment, it's not relevant. If there is a recurring federal benefit payment and your letter notifying the customer makes a clear accusation of fraud, it is not clear to me that you would be obligated to continue to provide the funds to the recipient vs. returning them as the 30 day period is inapplicable.

Consider whether you want to make a clear accusation of fraud based on an attempted deposit unrelated to the federal payment...

If a customer has fraudulent items being deposited into their account that are unrelated to the federal payments, must we give them 30 days notice or can we simply return the federal payments?

notime, read John Burnett's post above in this thread.

The fraud need not involve the federal payments at all. It could be as simple a matter as suspecting the customer of kiting checks, which is clearly a type of fraud. In that case, I believe you would be justified in closing the account without the 30-day notice, and informing the customer that if he or she does not make other arrangements for the next federal payment, it will be returned to the authorizing agency because of the closing of the account.

In addition to the comments from Ken and John, if you elect to close the customer's account you should decide if you are just closing the account in question or the customer's entire relationship with your bank (including other deposit accounts, safe deposit box and/or credit facilities). If the closure of the account will have an impact on some other relationship the customer has with your bank (e.g., loan payments are automatically debited from the account in question), you should decide how you will address that impact in your closing letter.

You should consider including the following points in the closing letter:

- Advising the customer that the customer can voluntarily close their account prior to scheduled closing date;
- Stating you will only issue a check to the customer for collected funds (and if the account has uncollected funds at the time of its closing you will issue another check if and when those funds become collected;
- Stating you reserve the right to place a hold on any deposits made pending the closure of the account;
- Stating you will return unpaid any item presented for payment against the account after it is closed.