Check Fraud : What you need to know

Recently, I settled a case against a bank because it paid on my client's checks which were forged by an employee of my client. No sooner had I settled that case, when a new case with nearly identical facts arrived on my desk. These cases can be financially devastating. Both clients are small businesses where people tend to handle multiple roles and trust runs high between owner and employees.

The scheme set out in the Uniform Commercial Code is a complicated one. There are a number of applicable statutes and who has to prove what shifts depending on the facts. The best thing an owner to can do is to take some simple steps when managing bank accounts to prevent embezzlement in the first place.

1. Review and reconcile your statements every single month as soon as possible after the statement arrives. Check fraud is controlled by state law. Most, if not all, states have adopted the Uniform Commercial Code which as its name implies creates a model code. Therefore, the law is relatively consistent from state to state. Section 4-406 requires an account holder to promptly review statements and notify the bank within 30 days after the statement is sent about any irregularities in the statement. Irregularities would include unauthorized checks, other unauthorized withdrawals, or math errors. If you do not notify the bank within 30 days after you receive your statement, then you will have a difficult time recovering the funds from any forged check and any check subsequently forged by the same person. There are, of course, exceptions to the rule, but the burden shifts to the bank to demonstrate that the bank negligently paid the items and that it paid them in bad faith.
2. If someone besides the owner reviews and balances the statements monthly, the owner should review the statements him or herself every single month.
   
3. Keep your checks, rubber stamps and other account supplies in a locked cabinet which is located in an area other than the responsible employee's office. An account holder can be precluded from recovery if he or she contributes to the fraud by its negligent behavior. This concept is found in the UCC at 3-406.
   
4. Take care in hiring employees. Consider running background checks to determine if there is any criminal misconduct in the job candidate. Check references and be sure to determine the connection between the candidate and the individual providing the reference. Is it a relative? Someone who loaned the candidate money? Just as one must check the source of information provided on the internet because some people have agendas, you must do the same when you check references.
   
5. Maintain a good relationship with your local bank officer. In both of my cases, the embezzler was discovered because the local bank branch called to tell the owner that the business was going to bounce a check.

Despite all the precautions, check fraud may occur. However, if you are vigilant in reviewing the statements and reconciliation, you will be more likely to discover the problem early. Not only will this minimize your financial loss, but it will mazimize your chances of recovering from the bank for paying on an unauthorized check.