Deposit Fraud On The Rise?
I’m not talking about sophisticated schemes, it’s this simple: an employee takes a $10,000 check made out to General Motors Corp., scrawls a handwritten endorsement “GM” on the back, and then deposits it directly into their personal checking account.
“The teller will catch it”, you say. Well, would you believe 220 fraudulent deposits over 18 months? And don’t think this was caught by sophisticated fraud detection. How about a disgruntled soon-to-be-ex husband who called the FBI because his wife wouldn’t share the proceeds.
The truth is, I wouldn’t be hearing about cases like this if the losses were low, or if they were being caught. Multiply this example by hundreds of checks over a several year period and you’ll see how large the fraud can get. And in every case I’ve seen, the courts decided against the bank!
Here’s the typical pattern. An employee of a company (typically the bookkeeper) steals checks. Not simply blank checks, but either payments made to their company and diverted from accounts receivable, or checks their company is getting ready to send as payment to vendors. They then they write a simple handwritten endorsement and deposit it into their own personal account, usually at an ATM.
And if you thought the company would catch on after a few statement cycles, you’d be wrong. These fraudsters get very innovative when it comes to exploiting holes in their company’s accounting systems. Who better to know than the bookkeeper! Just think about those bank frauds that went undetected until that dedicated, hardworking employee finally went on that long delayed vacation.
What you need to know is this: the bank that is first in the food chain, i.e. the bank where the check was first deposited, is the one on the hook. Without getting technical, the rules and regs state that the Depository Bank has the responsibility for taking reasonable means to verify the endorsement. That’s because the initial deposit is the only step in the process where it can be done effectively. Once the check leaves the Depository Bank, (to the Clearing Bank or Payee Bank) it is handled by high speed check sorters and there is no opportunity to physically examine it.
The rules are the same whether the transaction is handled at the teller or the ATM – there’s no special “ATM exception”. It’s also true if you are servicing deposits on behalf of another institution, e.g. an agreement by a bank to accept retail deposits on behalf of a correspondent bank.
The reason why we tend to see these fraudulent transactions more frequently at ATM’s is probably due to the desire for anonymity on part of the depositor, and rote behavior by bank employees (quick glance at the back of the check to verify the endorsement). But that’s just my opinion. When interviewed, many of these embezzlers said they made deposits at the teller and weren’t challenged. They went to the ATM because they were working long hours and couldn’t get to the bank before it closed.
So why aren’t these frauds being caught? It’s really surprising that such a simple scheme can fool most banks. We’ve heard so many stories recently about ATM deposit fraud; I don’t know whether they are truly on the rise, or if I’m just hearing about it more from clients. What I do know is that each of these cases resulted in significant losses for the bank – up to $1 million – and with the right precautions, they could have easily been detected.
The flags are obvious. This type of handwritten endorsement is not typical for most corporate deposits, the checks are made out to a company not located in the community (and therefore probably not a customer), and the check was made out to a business but deposited to a personal account (perhaps harder to tell at the ATM but a simple account lookup would have exposed this).
When this does happen, the first instinct of many banks is to blame the company for lax bookkeeping practices. While sometimes this has resulted in shared loss, the majority of cases we have seen result in the bank accepting between 50-100% of the financial hit.
Rather than waiting for this to happen to you, take some time today to prepare and protect yourself. Check your internal procedures. Periodically conduct refresher training. Help your front line staff understand how they can flag potential fraud without unnecessarily inconveniencing legitimate customers.
It’s worth reviewing your practices, because when it comes to failure to verify deposit endorsements, there is really no one for the bank to blame but themselves.