Money & the Law: Checks are still safe but use caution
Although check fraud has been around as long as there have been checks, a recent article in the New York Times began by stating “check fraud is growing rapidly.”
The article went on to say one reason for this is that checks are being stolen, physically or digitally, and sold over the internet. Once a check is stolen, the thief will know the name of the owner of the account, the name of the bank on which the check is written, the account number and the bank’s routing number. Then, multiple fraud opportunities emerge.
For example, the thief can create counterfeit checks, forge the account owner’s signature as the drawer of the check and buy things. Or, the thief can buy things online by claiming to be the account owner and using the account number and bank routing number.
The New York Times article said another means by which criminals steal money out of a checking account involves washing the payee’s name off a stolen check and substituting a new name as payee. After that, the thief opens a new account at a different bank in the new payee’s name, deposits the altered check in this new account, takes all the money out of the account and disappears into the night.
Also, one technological development facilitating the theft of checks given to a merchant in payment for goods or services is that the merchant can now deposit customer checks in the merchant’s bank using a scanned image of the check. The merchant might then leave the original check, which is no longer needed, sitting around, inviting a theft.
But to get to the essential point here, are checks safe? I would say, yes, checks are safe, as long as you regularly review your bank statements, paper or online, and promptly report a wrongdoing to your bank.
Legally, a check is an order from the account owner to the bank on which the check is written authorizing the bank to pay the check. If the account owner’s signature as drawer of the check is a forgery or the check has been altered by changing the name of the payee, the check is not “properly payable” and the bank will have a legal duty to reimburse its customer for the amount of the check.
However, if the account owner fails to review, with “reasonable promptness,” the statements the bank has provided and report the theft, the bank may be able to shift the loss back to the account owner.
Banks now employ high-tech tools designed to detect check fraud, and they are extremely cautious when setting up accounts for new customers. All of this helps to improve the safety of using checks.
As a final comment, there is one risk with a check payment that you have to live with. If you pay a fraudster with a check and the fraudster cashes your check at a store having no knowledge of the fraud, even though you stopped payment, you will be liable to the check cashing store for the amount of the check.
The law gives the store the status of a “holder-in-due-course” and favors its interest over yours. (There is some logic to this since you were the first one to deal with the fraudster.)
Although the law has placed guardrails around the use of checks, you still need to be prudent in their use.
Even though your bank might have a legal duty to reimburse you for payment of a check that was not “properly payable,” getting your bank to honor this duty can be a time-consuming and frustrating experience, starting with the need to work your way through your bank’s telephone maze in search of a real person to help you.
Jim Flynn is a business columnist. He is with the Colorado Springs firm Flynn & Wright. He can be contacted at moneylaw@jtflynn.com.
Money & the Law columnist Jim Flynn. THE GAZETTE FILE
