Periodic Bank Statements in US Cheque Fraud Litigation: The Dangers of Keeping up to Date on One's Account
| Published date | 01 February 1996 |
| DOI | https://doi.org/10.1108/eb025739 |
| Pages | 370-372 |
| Date | 01 February 1996 |
| Author | Michael S. Kim |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 3 No. 4 — Banking
BANKING
Periodic Bank Statements in US Cheque Fraud
Litigation: The Dangers of Keeping up to Date on
One's Account
Michael S. Kim
The risk of cheque fraud is serious for companies
that maintain bank accounts with a high volume of
chequing activity. Sophisticated criminals could
create convincing replicas of
a
company's cheques,
or steal blank cheques from the company and
forge the necessary signatures. In some cases,
employees entrusted with clearing accounts pay-
ables embezzle company funds by writing cheques
to dummy payees and cashing the cheques with
false identifications. By the time the fraud is dis-
covered, the criminals and the money are usually
long gone, and the bank and the company are left
to argue over who should bear the loss.
One impulse among company managers might
be to ask the bank for more frequent periodic
statements that show the cheques written on the
account and the withdrawals that occurred. Such
statements could be made available on paper or via
computer modem. With bi-weekly rather than
monthly account summaries, for example, the
company's fraud prevention staff would have an
option to review the account's activity more fre-
quently for suspicious transactions.
What is wise from a business standpoint, how-
ever, is sometimes foolish from a legal one. When
dealing with US banks, such extra prudence could
prove to be the company's downfall in subsequent
litigation against the bank to recover funds that
were wrongfully paid out to a
thief.
In one of the
many ironies of US law, sometimes it is better for
a company not to receive frequent updates of its
account's status and instead to be oblivious to the
money being stolen from its coffers.1
THE LEGAL REGIME
Cheque fraud problems in the US are governed by
Articles 3 and 4 of the Uniform Commercial
Code. Although some state variations exist, the
basic provisions are uniform throughout most of
the US. These Articles were revised in 1990, and
since that time, various states have been modifying
their own statutes to conform to the new version
of the Code.
When a bank pays out funds on a forged
cheque, the bank is liable to the customer.2 This
rule was not changed by the 1990 revisions, so the
bank's liability remains the default rule. The bank
can, however, force the customer to pay for the
loss if the customer's negligence 'substantially con-
tributed' to the forgery.3 So for example, if the
company was lax in guarding its signature
machines, or placed the forger in the position of
trust in the first place, then the company could not
recover the funds from the bank.4
If found negligent, the customer can in turn
argue that the bank's negligence substantially con-
tributed to the payment of the forged instrument.
If the bank's negligence also played a role, the loss
is allocated between the customer and the bank
'according to the extent to which the failure of
each to exercise ordinary care contributed to the
loss'.5
This is a completely new rule that was
installed by the 1990 revisions. This comparative
negligence rule is now making its way into the
laws of many states. Formerly, if both the cus-
tomer and the bank had been negligent, only the
bank bore the loss.6
When bank statements are involved, these lia-
bility rules must be read in conjunction with s.
4-406. That section imposes a duty on the bank to
ensure that statements contain sufficient informa-
tion to allow the customer to detect fraud.7 The
customer also has a duty to inspect the statement
and to notify the bank promptly of any suspicious
activity.8 If the customer fails to fulfil his duty, he
is precluded from recovering from the bank any
funds that were lost as a result of his inaction.9 If,
however, the bank also failed to exercise ordinary
care and such failure substantially contributed to
Page 370
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