We have a customer who had a fraudulent check clear his account. The check was washed, and a new payee added. The check was deposited at a different FI on 10/21 and the customers statement cut on 10/31. The customer did not notify the bank until 12/7. Since the check cleared the customer also had his November 30th statement drop as well. What is the banks obligation in reimbursing the customer the funds that he lost in this situation? I am having a tough time finding guidance that speaks to how much time a customer must report this fraud to the bank.

UCC 4-406

(f) Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available to the customer (subsection (a)) discover and report the customer's unauthorized signature on or any alteration on the item is precluded from asserting against the bank the unauthorized signature or alteration. If there is a preclusion under this subsection, the payor bank may not recover for breach of warranty under Section 4-208 with respect to the unauthorized signature or alteration to which the preclusion applies.

Unless you shorten this via your depositor's agreement.

So, if I'm reading this correctly unless we have shorted this time period in our deposit agreement the customer has 1 year to report the fraud to us, and assuming it's within the one-year mark we as the depository bank are responsible to refund the amount of the check that was washed? If this is accurate our only recourse would be to go after the bank that cashed the check in hopes they take responsibility?

Yes, the customer has a deadline to notify their bank. It can vary from one year (per the version of UCC 4-406 that Randy provided) to as little as 180 days in Florida or 60 days (!) in Georgia. So know what the UCC says in your state.

Your bank should get an affidavit of alteration from your customer. Your bank can then file a claim against the depositary bank for breach of the presentment warranties in UCC 4-208 (the depositary bank warrants to the paying bank that, among other things, the check was not altered). But you cannot make such a claim if you give your depositor a break and reimburse them when their claim is late under 4-406.

UCC 4-406's time periods can be shortened by appropriate language in your bank's deposit account agreement. Check with bank legal counsel before trying to insert such language to make sure it will be effective in your state. Courts sometimes determine that such deadlines in deposit contracts are unreasonable.

Thank you both!