Molly E. McManus
A trusted bookkeeper writes herself a check on your company's account, and forges your signature on it. Your assistant takes a check made payable to the company out of the incoming mail and endorses it over to himself. Your top salesman asks you to write a check to a supplier which does not actually exist, and absconds with the proceeds. Who is liable for the losses that result from these situations – your company, or your company's bank?
The liabilities of banks and customers for losses resulting from fraudulent checks are governed by the Uniform Commercial Code ("U.C.C."). The provisions of the U.C.C. generally attempt to place the loss for any situation on the party it deems best able to avoid it. In many situations, that party is the company that employs or does business with a wrongdoer. In order to truly be able to avoid check fraud losses, however, a company must be aware of the circumstances under which it might bear liability, and then carefully structure and supervise the work of bookkeepers and other employees who come into contact with checks.
Forged Drawer's Signatures
One way in which an employee might commit check fraud is to write a check on the company's account to herself, and forge the signature of a person authorized to sign company checks. Under the U.C.C., such a check was not authorized by the company, and is therefore not "properly payable" and generally cannot be charged against the company's account. There are at least two circumstances, however, under which the company might be held liable for checks with forged drawer's signatures.
The "read-your-statement" provisions of the U.C.C. impose a duty upon every account holder to examine their regular account statements and discover the existence of unauthorized checks. If a customer fails to notice an unauthorized check within 30 days after the statement was mailed, the customer will be held responsible for any subsequent unauthorized signatures by the same wrongdoer. This means that where an employee embarks upon a scheme of regularly writing herself company checks, the company may be able to avoid payment of the forged checks written at the very beginning of the scheme, but will not escape responsibility for later forgeries.
Even where only one check is forged by an employee, the employer has a limited right to recover from its bank. The "read-your-statement" provision requires a bank customer to discover and report an unauthorized signature within one year of the time the account statement listing the check was sent. If this one-year deadline is missed, the company will be unable to dispute its bank's payment of the check.
Finally, the U.C.C. has a provision that divides responsibility for forgeries between a bank that pays an unauthorized item and a company which is in some way negligent in allowing the forgery to take place. Examples of company negligence include failure to safeguard company checks, or failure to adequately screen or supervise employees.
Under U.C.C. § 3-405, an employer is liable for forged company endorsements made by any employee who is given "responsibility with respect to instruments." This section of the U.C.C. also holds a company liable if a responsible employee takes a company check made payable to a third party and forges that third party's endorsement on it. This means that if a company bookkeeper steals a check payable to the company and signs the company's name on the back of it, or takes and fraudulently endorses a check payable to a supplier that is waiting to be mailed out, the company can be held liable for the amount of that check.
Imposters and Fictitious Payees
When company checks are written to fictitious payees, or written to real payees at the request of a person who has no intention that the check will ever be given to that payee, the company can be required to pay those checks when they are cashed by the wrongdoer.
The so-called "padded payroll" case is the most common example of the fictitious payee situation. In this case, an employee invents another employee, and convinces the company to write paychecks to that person. If the company does so, it will have to pay the checks when they are cashed with an endorsement that matches the name of the payee. An employee might also fabricate a supplier – either a fake company, or a real company that is not actually owed payment – to induce his company to write a check. If a check is written to a supplier under these circumstances, the company will again be required to pay the check.
Imposter cases involve impersonating a person to whom the company owes money, or impersonating the agent of a company to whom payment is due. The imposters in these cases will not be company employees; they will instead be third parties with whom the company deals. For example, an individual might appear at a company's office falsely claiming to be the president of a supplier, and might ask for a check for that supplier's latest invoice. If the imposter is successful in convincing the company to write a check, the company will be responsible for paying it if it is endorsed in the name of the payee designated on it.
Steps to Take to Avoid Check Fraud
In order to decrease the risk that your company will be the victim of check fraud, you should take the following steps:
- Safeguard company checks and check-writing equipment.
- Promptly reconcile bank account statements with your company's check ledger. Ideally, responsibility for writing checks and reconciling bank statements should be divided between different employees.
- Carefully supervise all employees who have access to blank company checks, company checks payable to suppliers waiting to be mailed out, and checks made payable to the company. Investigate the background of all employees who will be given responsibility with respect to instruments.
- Keep meticulous track of expected payments from customers so that stolen checks are quickly detected.
- Demand documentation of all company payables before a check can be written, and examine that documentation for authenticity.
- Do not allow company employees to request a check to a supplier, and then deliver that check to the supplier themselves. Again, division of responsibility is key – the checks should be mailed to the supplier by different employees than those requesting payment.
- Verify the credentials of representatives who ask for checks to their companies, and consider contacting the company to notify it the check has been written. Any requests that checks should be made payable to an individual for an obligation to a company—even if that individual is an owner of the company—should be declined.
If you have any questions, please contact Molly E. McManus at firstname.lastname@example.org or 616.752.2196 or your WN&J attorney.