First of all, note that the business is a government agency. As "businesses," they run all over the map as far as internal controls are concerned. Some are better than others at detecting frauds.
I cannot conceive of a reasonable scenario in which a government agency would manually endorse checks it receives over to an individual. Trying to honestly dig back into my days as a teller (we used abaci and hieroglyphics), I'd like to think I would have thought this situation a bit strange, at best. I'm going to guess that a number of these deposits might have been made at ATMs, however, where endorsements should not be, but are, less carefully reviewed, in my experience.
In any event, I think that the best this bank can hope for is to try to convince the government agency that it should bear some of the loss here, since it was apparently lax in its employee supervision. It would be a weak argument at best for the bank to use, but it may be the only one it has.
John S. Burnett
Fighting for Compliance since 1976
Bankers' Threads User #8