Banking liability and avoidance of check scams: Enforcing deposit agreements when customers have been defrauded by Nigerian check scams

By: Charles B. Jimerson, Esq.

Stop me if you have heard this one: An attorney receives a call from a desperate potential new client.  Somehow the business transaction this international client was dealing with has hit an unexpected bump in the road, and because the client is dealing with an international business set here in the U.S., the situation now requires the fine eye of an experienced business litigation attorney.  The company the new client claims he works for and the debtor checks out so the attorney draws up representation papers and accepts the new client.  Within no time at all the client calls and informs his lawyer a settlement to be paid to the lawyer’s trust account within days.  Time is of the essence, and the client convinces the lawyer it needs the money wired as soon as the lawyer receives the money order or cashier’s check.  When the payment arrives the attorney diligently takes the money order or cashier’s check to the bank and inquires about the validity of the money order.  The clerk at the bank informs the lawyer everything checks out, and the lawyer wires the payment to his new international client and its foreign bank account.  Thinking all is well the attorney goes about his normal business only to find out weeks later that he has been successfully conned.  There was no dispute, the money order or cashier’s check was fraudulent, and now his trust account is tens, if not hundreds, of thousands of dollars in the negative.  The lawyer blames the bank for letting him send the wire. As a bank, if this was your banking customer, would your deposit agreement protect the bank against liability for this huge loss?

These scams are not a novel issue.  Modern-day checking scams are designed to take advantage of how banks handle checking deposits, specifically deposits of cashier’s checks or money orders.  Once a counterfeit check enters the banking system and has been successfully deposited (at least for a time period during which the depositary bank irrevocably wire transfers funds out of the country), the question becomes who is liable and who will or should ultimately bear the loss. As regularly happens, the depository bank suffer the initial loss when it advances funds and charges back the overdrawn customer when the drawee bank refuses to honor the fraudulent check. It is then up to the victim bank to seek redress from the victim customer. Liability for returned checks is most often addressed in the deposit agreement, with the customer obligated to reimburse the bank for any fraudulent check advances. This is not in derogation of common law because the customers are in the best position to avoid the fraud because they have directly interfaced with the fraudfeasor and are more apt to determine whether the transaction is legitimate and the instrument is genuine based on their personal interactions and professional judgment.

Under Florida law, when a customer presents a cashier’s check to his or her bank, the bank typically issues a “provisional settlement” which entitles the customer to use those funds before the payor bank endorses and pays the amount of the check. §674.215, Fla. Stat. (2012). This provisional settlement, under normal circumstances, is paid by the payor bank and with lapse of time becomes a “final settlement,” which is then irrevocable by the collecting bank.  Id.  However, in checking scams the fraudulent check causes the payor bank to reject the check and refuse payment.  To recoup the provisional settlement made available to its customer, the collecting bank issues a “charge-back” of the provisional settlement on its customer’s account.  §674.2141, Fla. Stat. (2012).  Banks are permitted to issue a charge-back even in the event that non-payment occurred because of the customer’s bank’s own negligence in processing the check or failure of the bank to exercise ordinary care.  See id.; §674.103(3), Fla. Stat. (2012) (banks act with ordinary care when acting consistently with general banking usage).

One of these common modern-day checking scams, known as a “Nigerian Check Scam,” has become increasingly popular as advancements in technology allow for more believable fraudulent checks.  Under this scam, once the provisional settlement is made, the banking customer accesses the funds available and sends cash, typically by wire, to a foreign account to satisfy the scammer’s requests.  These wire transfers are typically instantaneous and almost always irreversible.  Later, the payor bank refuses payment on the fraudulent check causing the collecting bank to issue a charge-back on its customer’s account.  By this time the customer has typically sent a large amount of money to the scammer, leaving the customer’s account in the negative after the charge-back, and the customer, now victim, at a huge loss.

Regretfully, the lawyer in the above hypothetical was the victim of a Nigerian Check Scam.  Although courts have shown sympathy, they have consistently denied claims against banks brought by victims who have incurred losses as a result of these scams.[i]  The bank above attempted to verify the validity of the cashier’s check at the request of the lawyer and was under the impression it was valid.  In doing this, it likely acquired no additional duty to ensure its representations were accurate. After this verification the bank was under no additional duty to warn the lawyer of the possibility that the check may have been a scam, and as long as it acts with ordinary care when it makes funds available to the lawyer before final settlement it should be absolved from liability. Disbursing funds in accordance with banking policy (typically one day availability if a hold is not placed) is usually sufficient care, so long as that policy is outlined in the bank’s deposit agreement.  Furthermore, it is permissible under Florida law to issue provisional funds before final settlement of the check for transactions like the lawyer’s.  See Fla. Stat. §674.2141(4).  After discovering the cashier’s check is fraudulent, Florida law allows banks to charge-back on the lawyer’s account for the amount of the fraudulent check, so long as those rights are in accordance with the deposit agreement.  See Fla. Stat §674.2141.

A common defense asserted by fraud victims is active negligence on the bank’s part in failing to identify and prevent the fraud. The customer may claim that it was the bank who failed to exercise “ordinary care” in evaluating the authenticity of the check, or by following appropriate banking procedures, and therefore the bank is liable for the unfortunate distribution of the funds.  Case law supports that this defense is unsuccessful if the counterfeit instrument is indistinguishable from a genuine check, because a reasonable bank tellers cannot be held to a specialized expertise standard to be able to detect and vet counterfeit checking instruments. There is typically no duty imposed upon a bank to warn the victims of the possibility that the fraudulent checks may be a scam.  See Bank One, N.A. v. Dunn, 927 So. 2d 645, 649 (La. Ct. App. 2006) (granting summary judgment for bank and noting that it is customer’s duty to beware of Nigerian checking scams). In fact, just last year, Florida’s First District Court of Appeals has recognized a bank’s right to charge back the deficient debt to the account debtor in the event the funds cannot be finally settled. SunTrust Banks, Inc. v. Cauthon & McGuigan, PLC, 78 So. 3d 709 ,711 (Fla. 1st DCA 2012) (recognizing bank’s right to issue charge-back when check turns up fraudulent pursuant to both Florida statute section 674.2141 and bank’s customer agreement).

In sum, as long as the collecting bank acts pursuant to its deposit agreement and ordinary banking procedures, Florida law usually upholds deposit agreements protecting banks from losses in connection with checking scams like the one discussed.

How can banks avoid these scams?

There are several basic steps that a depository bank can take to protect the bank and its customers from being victims of check scam fraud. First, if the check is over a stipulated amount or appears to be an unusually high dollar amount for a specific banking customer, the bank should contact the payor bank to verify that the bank in fact exists, the account information is legitimate and accurate, and that the account contains enough funds to cover the check amount. Upon first notice of any discrepancies, the depository bank should consider refusing the deposit and should flag the account for suspicious activity follow up.

Alternatively, the depository bank can opt to handle checks that are uncharacteristically large for that customer as a special collection item which is sent to the paying bank directly instead of the Federal Reserve System. The depository bank would then wait until it receives the funds from the payor bank before making them available to the customer. In doing business this way, the depository bank should make sure that it is in compliance with funds availability policies and regulations.

Lastly, given the fungibility of bank tellers and branch managers, banks should continually stay abreast of fraud alerts and fraud prevention training techniques to ensure that current personnel are informed as to the latest variant of the ever evolving check scams that plague the industry. There are numerous articles and resources available through the RMA and other banking related organizations that can supplement internal training programs.

 


[i] See SunTrust Banks, Inc. v. Cauthon & McGuigan, PLC, 78 So. 3d 709, 711 (Fla. 1st DCA 2012) (finding that bank had a right to issue a charge back in Nigerian check scam pursuant to both Florida statutes section 674.2141 and bank’s customer agreement); see also Fisher & Mandell, LLP v. Citibank, N.A., 632 F.3d 793, 799-800 (2d Cir. 2011) (granting summary judgment for bank after plaintiff withdrew “available” funds and bank later issued a charge-back on the account after discovering check was fraudulent); Chase v. Morgan Guarantee Trust Co., 590 F. Supp 1137, 1139 (S.D.N.Y. 1984) (granting motion for summary judgment for bank and noting that it is clear law that provisional credits are subject to charge-back); Bank One, N.A. v. Dunn, 927 So. 2d 645, 649 (La. Ct. App. 2006) (discussing Nigerian scam and upholding summary judgment for bank after issuing a charge-back, noting that “Bank One owed no duty to protect [defendant] from his notably poor judgment.”);JP Morgan Chase Bank, N.A. v. Cohen, 907 N.Y.S.2d 101, (N.Y. Sup. Ct. 2009) (dismissing defendant’s defense that bank had acted in bad faith after finding that bank was not negligent when employee stated to customer that the checks had “cleared” but were later found fraudulent and bank issued charge-back); Call v. Ellenville Nat. Bank, 774 N.Y.S.2d 76, 78 (N.Y. App. Div. 2004) (finding that until final settlement is made upon check, the depositor bears the risk that the check may be fraudulent, and until such final settlement is made bank may issue a call back of provisional funds); Bank of New York v. Reichin, 607 N.Y.S.2d 475, 792 (N.Y. App. Div. 1994) (holding that partial summary judgment for bank was proper because any provisional settlement on account is subject to being revoked if bank never receives final settlement for the check).

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