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HOW TO TACKLE FRAUD: CHECK, ACH and WIRE. BY: ELIZABETH MADLEM, ASSOCIATE GENERAL COUNSEL. B2B HOUSEKEEPING RULES. This is only a broad overview—Always refer back to the actual provisions cited.
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HOW TO TACKLE FRAUD:CHECK, ACH and WIRE BY: ELIZABETH MADLEM, ASSOCIATE GENERAL COUNSEL
B2B HOUSEKEEPING RULES • This is only a broad overview—Always refer back to the actual provisions cited. • Live questions will not be addressed, but please feel free to send in any follow-up questions to our Hotline: hotline@compliancealliance.com or 888-353-3933
WEBINAR OVERVIEW “Fraud and deceit are anxious for your money. Be informed and prudent.” -John Andreas Widtsoe
Basic Background: Elements of a Check • Maker Information • Date • Payee • Numeric Dollar Amount • Written Legal Amount • Bank Information • Memo Line • Make Signature Line • Check Number • Account Number • Routing (ABA) Number • Payee Indorsement • Restrictive Indorsement
Warranties Presentment Warranties Transfer Warranties
Types of Fraud:Forged Payee Indorsement *Generally involves stolen checks!
Types of Fraud:Forged Maker Signature *Generally involves stolen blank checks!
Midnight Deadline Rule • Midnight Deadline: UCC 4-301—Bank must either pay the check or return it by its midnight deadline • Midnight of the banking day following the banking day the check is presented for payment (UCC 4-104(10)) • If a check was presented for payment on Monday, the Payor Bank could either pay it or return it by midnight Tuesday • A Depository Bank cannot avoid liability to a Payor Bank when it cashes or accept a check for deposit over a Payee’s forged or missing indorsement by claiming a Payor Bank failed to return the item by its Midnight Deadline. • Normally, Payor Bank will be required to pay the entire amount of the check to the holder whether or not it was properly payable.
But Wait! …Late Returns and Defenses • Normally, Payor Bank will be required to pay the entire amount of the check to the holder whether or not it was properly payable.
Late Return Defenses • Breach of Presentment Warranty • Fraud • Emergency Conditions • Consent to Hold Beyond Deadline • Bank did Meet Midnight Deadline • Mistake • Check Sent for Collections
Hypothetical 1: Bank’s customer deposited a check drawn on another bank into his account in 11/17. On 1/18 bank receives an Affidavit of Forgery from the other bank saying the Maker’s signature was forged. Who is responsible to reimburse? Presenting Bank Payor Bank
Hypothetical 2: Your customer wrote a check to John Doe, an individual. The check was deposited into a business account where John Doe is an authorized signer, but John Doe claims he did not indorse the check nor receive benefit of the funds (they were withdrawn by another parting after being deposited into the account). What does your bank have to consider? • Here, John Doe’s indorsement was forged. It was signed John Doe but he did not sign it. • The Depositing Bank is generally liable for forged or missing payee indorsements and altered checks. • If the Paying Bank’s customer claims that John Doe did not receive the funds and his endorsement was forged, then your bank will have a Breach of Presentment Warranty claim against the Depository Bank.
Hypothetical 3 • Your customer, Jane Doe, has a personal checking account with you. She works for ABC, Inc., who informed your bank that Jane Doe has been forging indorsements on checks and depositing them into her account with you. Half have the forged indorsements were of payees on checks that she signs over to herself. The other half are forged ABC, Inc’s indorsements and forged ABC, Inc’s signatures. Jane Doe takes customers of ABC Inc’s payment checks, forges ABC, Inc’s signature and signs them over to herself, Jane Doe. However, your bank learned, however, that ABC, Inc. leaves blank checkbooks out around the office with no protocol on check writing. Now what? • Is Jane Doe an authorized signer or one with authority to write checks? • Yes- Then the fraudulent indorsements would be deemed accepted in good faith per UCC 3-405, even though they were outside the scope of her duties. • No- Then your bank, Depository Bank, is liable because you warranted that the indorsements were correct. But you may have a claim against your customer. • For the forged payee indorsements, the checks have been altered. Your bank, Depository Bank, bear the responsibility per UCC 4-208 Presentment Warranty. But you can go after your customer if you have reason to believe fraud.
REGULATION E vs. THE NACHA OPERATING RULES • Automated Clearing House (ACH)—electronic network for financial transactions processing large volumes of credit and debit transactions in batches. • NACHA—governs the exchange and settlement of electronic funds transferred through ACH. • Regulation E—sets out the respective basic rights, protections, liabilities and responsibilities of consumer using electronic funds transfers (EFTs) and the bank’s that offer those services. § 1005.3 “Electronic Fund Transfer”: …The term includes, but is not limited to: • Point-of-sale transfers; • Automated teller machine transfers; • Direct deposits or withdrawals of funds; • Transfers initiated by telephone; and • Transfers resulting from debit card transactions, whether or not initiated through an electronic terminal. *This includes ACH transactions! Must disclose that one-time EFTs initiated using information from a consumer’s check are a type of transfer consumer can make (PPD, ARC, BOC, POP, TEL, WEB)
WHO ARE THE ACH PLAYERS? • Originator— The one who decides to make a transaction. • Originating Depository Financial Institution (ODFI)– Receives from Originator and processes request though ACH Operator. • ACH Operator— Processes all ACH transactions between different depository financial institutions (currently FedACH and Electronic Payments Network (EPN)). • Receiver– Organization or person that authorizes Originator to initiate ACH transactions. • Receiving Depository Financial Institution (RDFI)– Receiver’s depository institution that receives ACH transactions from ACH Operators and credits/debits Receiver’s account. • Third Party Processor/Sender– Intermediary between Originator of ACH payment and the ODFI that sends on behalf of its client through its own financial institution
Standard Entry Class Codes (SEC) • Designates what type of transaction was authorized by Originator or returned by Receiver Return Time Frame *Consumer SEC Return Codes = 60 days from settlement *Commercial SEC Return Codes = opening of second business day from settlement
Scenario 3: Business ACH SEC CODES: TEL- consumer (within 60 days) CCD- commercial (within 2 banking days) SEC RETURN CODES: TEL- R10 CCD- R29
ACH Recap and Warranties • Originator- responsible for executing ODFI-Originator Agreement with ODFI • Details rights and responsibilities of parties • Binds Originator to ACH Operating Rules • Acknowledges cannot violate US Law • ODFI has agreements with ACH Operator, Originator and any Third Party Processors • Warrants: • entries are authorized • Will terminate entries when appropriate and • Will transmit required information • Performs audits for origination of ACH entries • RDFI- accepts the entries • Relies on account numbers for posting and provide payment remittance information • Allowed to rely on SEC code used • Receiver- verifies that credit entries will be available by Settlement Date and debit entries are posted no earlier than Settlement Date
Bank Secrecy Act (BSA) • BSA deals with anti-money laundering • Specific requirements for domestic and international transfers over $3,000 USD
Scenario and Toolkits • Wire Transfer Policy • Wire Transfer Procedures • Wire Transfer Request Agreement • Wire Transfer Request Form • Wire Transfer Risk Assessment
Remittance Transfers • Fall under Regulation E: 1005.30 • Remittance Transfer: an electronic transfer of funds requested by a sender to a designated recipient that is sent by a remittance transfer provider • Excludes transactions of $15 or less and securities and commodities • Provider- provides remittance transfers for consumers in normal course of business (must meet threshold of 2 consecutive years, 100 or more) • Sender- consumer in a state who for primarily personal, family or household purposes requests a remittance transfer be sent abroad
Error Resolution • Specific error resolution requirements for oral or written notice of error from sender • See 1005.33 • Must be received by provider no later than 180 days after the disclosed date of availability of remittance transfer • If bank determines error, within 1 business day or as soon as reasonably practice, bank must correct error, refund sender amount of funds and make available to designated recipient amount approved by sender
Toolkits • Remittance Transfer Wire Log • International Remittance Transfer Action Plan • Wire Transfer Risk Assessment • Regulation E International Remittance Transfer Compliance Checklist
Questions? Thank you for your participation! We hope you found value in the presentation. If you have any additional questions, contact Compliance Alliance at hotline@compliancealliance.com or 888-353-3933.
