Mobile Bank Fraud: Paying a Check Twice?
BY FRED MENDELSOHN, PARTNER AT BURKE, WARREN, MACKAY & SERRITELLA, P.C. IN CHICAGO
In the old days, a typical check fraud case might involve an employee “losing” his paycheck and obtaining a replacement – only to “find” and cash the original, as well as its replacement,
before either the employer or its bank knew what happened. The
first check might be cashed at one institution (a bank), and the
replacement cashed “again” somewhere else (e.g., a local currency
exchange). Even if the check was dishonored at one of the institutions, the “holder in due course” rule of the Uniform Commercial
Code exposed the issuer of the check to liability for payment of it.
Bad behavior of this type has a nasty knack for keeping up
with the times. Fast forward to a 2012 Federal Reserve System
report indicating that a substantial (and growing) percentage of
smart phone owners use online banking applications, which have
become a breeding ground for fraud. Mobile banking is just that;
bank customers are now encouraged to simply snap a picture of a
check to (legitimately) deposit it via their smart phone. The original paper check could then be (illegitimately) negotiated again
elsewhere. Why should a payee receive value twice? Why should
the issuer of an HDC (high definition check) have to honor a check
twice? Is there anything that can be done?
Today’s available remedies differ from those of the past. One
form of relief exists in the Check 21 Act (“Check Clearing for the
21st Century”), a 2004 federal regulation designed to improve
check processing and targeting this type of problem. While the
Check 21 Act recognizes the validity of substitute checks, it also
provides certain warranty and indemnification protections to innocent drawers, depositors, and endorsers who receive a substitute
check — so that no one has to make multiple payments on one
Bad behavior like check fraud has a nasty knack
for keeping up with the times.
As with most federal legislation, the Check 21 Act has its complexities, with certain time limitations for asserting claims, and
technical “mumbo-jumbo” that might make it seem difficult to
avert liability traps (such as those created by mobile banking applications) — but at least it’s a start. Distributors should be aware
that they may have certain rights as to their bank vis-à-vis this type
The mobile banking scam is particularly acute amongst employers, who might consider the following approaches to foil rogue
• One solution is direct deposit, but both federal and state law
can stand in the way of employer’s mandating direct deposit for
employee payroll. Distributors are wise to check with their counsel
(including their state’s wage payment laws) about making direct
deposit a condition of employment.
• Another option is issuing a “pay card” (akin to debit cards) in
lieu of a paycheck, which seems to be a safer path. However, one
catch with pay cards: any fee or transaction cost with the payee’s
use of such a card (not necessarily caused by the employer) – particularly if the fee reduces the wages earned below minimum
wage – could render them illegal for payroll purposes.
• The use of a restrictive endorsement on the back of an original
“paper” check, placing recipients on notice of the nature of a substitute check as contemplated by the Check 21 Act.
Consult with your counsel — should your company be exposed
to this type of liability, it may want to consider various protective
measures, such as those discussed above.
Distributors who wish to discuss fraud issues can contact Fred Mendelsohn at 312-840-7004 or firstname.lastname@example.org.