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Check fraud continues to rise, as fraudsters have become increasingly profitable by utilizing this old form of payment. Whether it’s stealing a check from the U.S. mail and altering the check or using authentic check stock to create counterfeit checks, this problem has become quite a headache for financial institutions.

And while financial institutions may understand the check warranties they hold, determining whether a check was altered or is counterfeit has become difficult in today’s image environment.

Here is the scenario our members saw time and time again in 2023:

XYZ Copiers issues check #6125 in the amount of $850 to B & B Printers for recycled printer cartridges. B & B Accounting Department receives the check and deposits through their Remote Deposit Capture system with their financial institution.

An employee working in the accounting department takes the original paper check home with them instead of securing it until the destroy date set by B & B Printers. This employee has some business check stock at home and a great laser printer. They have purchased software that can overlay all the information from check #6125 perfectly onto the business check stock, including the drawer’s signature. This software enables them to reproduce check #6125 for $850 but they change the Payee name to their name.

When the second check hits XYZ Copier’s account, they call their financial institution immediately and explain that check #6125 cleared a second time but to a different payee. Their financial institution sends a Breach of Warranty back to the depositary bank for the altered check. A week later the financial institution receives a denial letter from the depositary bank stating the item is counterfeit not altered, therefore; they did not breach any of their warranties.

What determines an alteration vs a counterfeit? If we look at Uniform Commercial Code (UCC) 3-407, it is clear as to what an alteration is:

"Alteration" means (i) an unauthorized change in an instrument that purports to modify in any respect the obligation of a party, or (ii) an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.

Since UCC was written many years ago, this definition is speaking to the physical paper check. That means an alteration must happen to the original paper check that was issued. Since counterfeit is not defined in UCC, it is assumed that if “new” check stock is utilized to create a check, this must be considered a counterfeit.

Now, in the example above, the depositary bank is stating the item was counterfeit and not altered. How can they prove a different check stock was used? Well, it appears their defense is that they are able to find other checks written from this drawer and drawn on B & B Printers’ financial institution.

By looking at the images of various checks, the financial institution can tell that the counterfeit check had a slightly darker background, key information was missing from the MICR line or the check stock that B & B utilizes has security features on them and this counterfeit did not. If this is what the depositary bank is claiming, then when your institution as the paying bank receives the denial, you must go and look at other checks clearing B & B’s account to see if you notice the same differences from the check you are claiming was altered. If you can determine that different check stock was utilized, then your institution is liable for the loss as the Paying Bank. If you cannot find differences, then you have a couple of choices. You can respond to the denial and claim that no differences were found, the physical paper check was altered and the depositary bank is in Breach of Warranty. Or, you may want to involve your legal counsel to help you respond to the denial letter. 

Interested in learning more about check fraud? It will be a topic of discussion at Paymentspalooza this year! We will be covering the counterfeit U.S. Treasury checks that started circulating last year and what FinCEN and the Bureau of Fiscal Services have issued to guide financial institutions in handling these counterfeit items. We hope you’ll join us virtually or in person at a venue near you next month!