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OCC BULLETIN 2007-2
To: Chief Executive Officers and Compliance Officers of All National Banks, Department and Division Heads, and All Examining Personnel

Description: Guidance to National Banks Concerning Schemes Involving Fraudulent Cashier's Checks

This bulletin discusses factual and legal issues related to fraudulent cashier's checks, including associated risks for depositary banks, and provides recommendations to national banks for managing these risks and protecting their customers. This guidance also generally applies to other official instruments, such as official checks and money orders.

Bank customers often deposit cashier's checks they receive from persons with whom they conduct business, including selling goods or services over the Internet. In some cases involving fraudulent cashier's checks, the customers are asked to wire other funds to third parties by the persons who sent the cashier's checks. When it becomes clear that the checks are fraudulent, many of those customers may seek redress from the bank at which they deposited the check. Situations involving fraudulent cashier's checks can expose a bank to reputation and other risks, as well as risk of loss to their customers.

Although this bulletin primarily addresses the risks posed to depositary banks by fraudulent cashier's checks, paying banks should also be aware that fraudulent instruments pose risks to them.1

BACKGROUND

Factual Scenarios

The OCC has become aware of an increasing number of consumer complaints relating to fraudulent cashier's checks. These complaints generally fall into one of the following factual scenarios:

  • Selling goods. The consumer sells goods in the marketplace, for example, over the Internet. A buyer sends the consumer a cashier's check for the agreed-upon price, and the consumer ships the goods to the buyer.
  • Excess of purchase price. This pattern is similar to the one described above. However, the buyer sends the consumer a cashier's check for more than the purchase price and asks the consumer to wire the excess to a third party, often in a foreign country.
  • Unexpected windfall. The consumer receives a letter stating that the consumer has the right to receive a substantial sum of money. For example, the letter may state that the consumer has won a foreign lottery or is the beneficiary of someone's estate. The letter will explain that the consumer must pay a processing/transfer tax or fee before receiving the money, but a cashier's check will be enclosed to cover that fee. The letter will ask the consumer to deposit the check into a deposit account and wire the fee to a third party, usually in a foreign country.
  • Mystery shopping. The consumer receives a letter stating that he or she has been chosen to act as a mystery shopper. The letter includes a cashier's check, and the consumer is told to deposit the check into his or her account. The consumer is told to use a portion of these funds to purchase merchandise at designated merchants and to transfer the remainder of the funds to a third party using a designated wire service company.
  • Money Transfer Agent. The consumer is solicited to act as a money transfer agent. The consumer is told that he or she will receive cashier's checks to deposit into his or her bank account. The consumer is then told to wire specific sums to various persons or accounts in other countries.

In each of the scenarios, the consumer believes that the cashier's check is valid and deposits the check into a deposit account. After the depositary bank makes the funds available to the consumer, the consumer sends goods or, where requested, funds to the third party. Some time later, the check is returned unpaid by the paying bank because the check is discovered to be fraudulent. The depositary bank then reverses the credit to the consumer's account. As a result of this check fraud, the consumer suffers a loss of the goods sold, the funds wired, or both.

It can be very difficult to detect fraudulent cashier's checks in these scenarios. Fraud perpetrators may employ various devices to delay or make more difficult the detection of the fraud. For example, the check may be drawn on a bank located in a different check processing region than the region in which the depositor is located. Fraud perpetrators also may take actions to make the transaction look as genuine as possible, such as using - and altering - a genuine check. Checks may also list the name of one bank, but contain the routing number for another bank. Similarly, the perpetrator may deliberately make part of the check illegible in order to ensure that the check must be handled manually, slowing its processing time.

Legal Issues

With respect to the activities of national banks, fraudulent cashier's checks raise two primary legal issues: funds availability and the authority to reverse a credit when a check is returned unpaid.

(1) Funds Availability. Funds availability is governed by the Expedited Funds Availability Act, 12 USC 4001 et seq., and Regulation CC promulgated by the Board of Governors of the Federal Reserve System, 12 CFR 229. Generally, a bank must make funds deposited by government and cashier's checks available within one business day after deposit, if certain requirements are met.2 Otherwise, the bank must make local cashier's checks (defined as checks payable by, at, or through a bank located in the same check-processing region as the location where the check was deposited) available within two business days after deposit. 3 The bank must make nonlocal cashier's checks available within five business days.4

Regulation CC contains several exceptions that allow banks to delay making funds available. If a customer deposits more than $5,000 in any one day, for example, the bank may place a hold on the amount over $5,000. 5 For purposes of this exception, the bank may aggregate all checks deposited into all accounts held in the customer's name, either as sole or joint holder.

The bank also may delay making the funds available if it has reasonable cause to believe that the check is uncollectible from the paying bank.6 For purposes of Regulation CC, there is reasonable cause if facts exist that would cause a reasonable person to have a well-grounded belief that the check is uncollectible. However, the bank may not base its reasonable cause determination on the fact that a check is of a particular class or has been deposited by a particular class of persons. Therefore, a bank may not, for example, place a hold on all cashier's checks.

If the facts support imposing such a delay, the bank may delay availability only for a reasonable period of time.7 Regulation CC also provides a safe harbor for determining a reasonable period of time for this purpose: the bank generally may withhold funds for a total of seven business days for local cashier's checks, and for a total of 11 business days for nonlocal cashier's checks.8 If the bank holds a check for longer than the applicable safe harbor, the bank must establish that the longer period is reasonable.

(2) Reversing the Deposit Credit. The Uniform Commercial Code (UCC)9 addresses the ability of a bank to charge back items returned to it, including fraudulent cashier's checks. Depositary banks generally may charge back to their customers the amount of checks that are later returned by the paying bank. 10 In addition, a bank may provide in its deposit agreement for the right to charge back any item regardless of when the item is returned to it. The fact that a depositary bank has made funds represented by the returned item available to the depositor - even if the depositor has made use of such funds - does not affect the bank's right under the UCC or its deposit agreement to charge back the item or otherwise obtain a refund from its customer.11 Similarly, if a paying bank mistakenly pays a fraudulent cashier's check, the UCC generally allows the bank to recover the amount paid.12

RISKS FOR DEPOSITARY BANKS

Customer deposits of fraudulent cashier's checks create a number of risks for depositary banks. For a variety of reasons, the customer may believe that the depositary bank bears some responsibility for his or her loss. For example, the customer may argue that the bank should not have credited the account before the check cleared, or should have followed different procedures in order to detect the fraud. Alternatively, the customer may claim that he or she was led to believe that the check had cleared by statements made by a bank employee, such as, that funds were available. The customer also may believe that the bank should not have reversed the credit after making the funds available.

This customer dissatisfaction would raise reputation concerns for the bank. In addition to the immediate customer relations impact, a bank could face broader reputational risk, including from possible litigation by the customer.

Depositary banks also may face credit risks in these situations. Reversing the deposit may cause the depositor's account to become overdrawn, and thereby create what is, in effect, a loan to the depositor. In that event, the customer may be unable - or unwilling - to repay the overdraft.

Paying banks also experience risks related to fraudulent cashier's checks. Paying banks that fail to identify fraudulent cashier's checks may pay the checks erroneously. Even if they identify the checks as fraudulent, they may find themselves liable for the amount of those checks if they do not return the checks in a timely manner.

RECOMMENDATIONS

National banks should take actions to address the risks to the bank and its customers posed by fraudulent cashier's check schemes:

  • Depositary banks should have appropriate procedures for processing and cashing cashier's checks that include methods of identifying potentially suspicious items and criteria for placing holds on deposits.13
  • Depositary banks should consider training or other steps to ensure that relevant personnel are aware of the increasing incidence of fraudulent cashier's checks. At a minimum, bank employees who handle deposits should be aware of the bank's procedures for identifying and handling suspicious cashier's checks. In addition, bank tellers could be trained to examine large-dollar checks more closely to identify suspicious cashier's checks, and to ask appropriate questions when customers deposit such cashier's checks.
  • Depositary banks should review their deposit agreements to ensure that the agreements appropriately address returned items and mitigate the risks related to fraudulent cashier's checks.
  • Depositary banks should be aware of the need to explain the status of deposits to its customers clearly and accurately, particularly in light of the potential for customer confusion. For example, without such information, customers may conclude that a check has cleared solely because the funds are available in the depositor's account. Tellers and other relevant personnel should receive appropriate training or other information to accomplish these objectives.
  • Depositary banks should consider methods of working cooperatively with deposit customers that become victims of cashier's check fraud. In addition to providing assistance to the customer in connection with their claims or other actions against perpetrators, it may be appropriate in some circumstances to convert a resulting overdraft into a more formal loan that the customer can repay over time, instead of demanding that the overdraft be repaid immediately.

The OCC issues periodic Alerts, as necessary, to provide information about counterfeit and stolen financial instruments, including cashier's checks, reported by national banks. OCC Alert 2006-58, issued on October 25, 2006, contains a list of Alerts concerning counterfeit and stolen instruments. More recent Alerts concerning counterfeit and stolen instruments are located on the OCC's Web site at http://www.occ.gov/topics/consumer-protection/fraud-resources/index-fraud-resources.html. National banks that become aware of counterfeit or stolen financial instruments are encouraged to notify the OCC's Special Supervision Division by e-mail at occalertresponses@occ.treas.gov or telephone at (202) 649-5470, and are required to notify law enforcement of certain suspected violations of law and suspicious transactions by filing a Suspicious Activity Report pursuant to 12 CFR 21.11. 

You may direct any questions to your supervisory office or OCC Compliance Division (202) 649-5470.

Ann F. Jaedicke
Deputy Comptroller for Compliance Policy

Michael S. Bylsma
Director for Community and Consumer Law