Check Fraud Statistics
- According to Ernst & Young more than 500 million checks are forged annually, with losses totaling more than $10 billion.
- According to a report issued by the American Banker, an industry bankers magazine, estimates of losses from check fraud will grow by 2.5% annually in the coming years.
- According to the Create-A-Check website, in 1997 there were about 496 million fraudulent checks written for a total of approximately $9.9 billion. This means that an average of 1.4 million fraudulent checks was written daily worth $27.3 million.
- According to the National Check Fraud Center, check fraud and counterfeiting are among the fastest-growing problems affecting the nation’s financial system, producing estimated annual losses of $10 billion and losses continue to rise at an alarming rate annually.
Check Fraud – Who is Liable?
- Current UCC Codes outline specific check fraud responsibilities for banks and corporations. Court decisions have already established guidelines for legal responsibilities, and failure to meet these guidelines can cause a bank or company to experience financial loss.
- UCC Revisions now define responsibilities for check issuers and paying banks under the term ordinary care. Under Sections 3-403(a) and 4-401(a), a bank can charge items against a customer’s account only if they are “properly payable” and the check is signed by an authorized individual. However, if a signature is forged, the corporate account may be liable if one of the following exceptions applies:
- According to UCC Section 3-103(7), ordinary care requires account holders to follow “reasonable commercial standards” prevailing in the area for their industry or business. Under 3-406, if they fail to exercise ordinary care, they may be restricted from seeking restitution from the payee bank if their own failures contributed to a forged check signature or an alteration – (for example, raising a check amount from $50 to $5000).
- Section 4-406 also requires customers to reconcile their bank statements within a reasonable time to detect unauthorized checks. This typically means reconciling statements as soon as they are received.
- The concept of comparative fault – Sections 3-406(b) and 4-406(e) – can shift liability to the check issuer. If both the bank and corporate account holder have failed to exercise ordinary care, a loss can be allocated based upon the extent that each party’s failure contributed to the loss. Since banks are not required to physically examine every check, companies may be held liable for all or a substantial portion of any given loss – even if the bank did not verify the signature on a fraudulent check.
- Liability for counterfeits that are virtually identical to originals will be examined on a case-by-case basis. The process used when issuing the check will be reviewed to determine if the company exercised ordinary care or contributed to the loss.
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