Introduction

Fraud is committed in a number of ways. The most common of which is fraud, which is committed by means of negotiable instruments, more specifically bills of exchange, the most prevalent of which is the so-called check fraud. This type of fraud also manifests itself in a number of ways. In order to understand the intricacies involved in the use of checks as instruments with which to commit fraud, a basic knowledge of terms relating to negotiable instruments and, with regard to check fraud, checks and systems used by bankers is necessary.

Bill of exchange

Section 2(1) of the Bills of Exchange act, 1964 (act no 34 of 1964) (hereinafter referred to as “the act”) defines a bill of exchange as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money, to a specified person or his order, or to bearer.

Check

A check is a bill of exchange drawn on a banker payable on demand.

Holder

A holder is the payee or endorsee of a mote that is in possession of it, or the bearer thereof. A holder is thus the creditor to whom the various debtors on a bill or note are liable.

Endorsement

In terms of section 1 of the act “endorsement” means an endorsement completed by delivery.

In National Bank v Paterson innes CJ stated that:” as applied to negotiable instruments, the term “endorsement” is capable of three meanings. In a general sense every signature written on the back of such as instrument is an endorsement, even if only placed there for purpose of identification, or as a receipt: that is the literal meaning of the word. Its ordinary legal meaning is the signing of a name on the back of an instrument amino indorsandi (if one may be permitted to use such a phrase), that is, with the intention of undertaking the will understood liabilities of an endorser. And there is a third meaning, which limits the term to an endorsement in the last-named sense followed by delivery of the document,”

Endorser

An endorser is a holder of an instrument payable to order who, by endorsement on the back of the instrument, negotiates it to another person who takes it as a new holder.

Negotiable instrument

A negotiable instrument is a document, evidencing a contractual obligation or obligations to pay money, or deliver a security for money, the transfer of which by delivery, or by endorsement and delivery, entitles a bona fide transferee for value to retain and enforce it, notwithstanding defects in the transferor’s title.

Promissory note

A promissory note is an unconditional promise in writing, made by one person to another, signed by the maker, and engaging to pay on demand, or at a fixed undeterminable future time, a sum certain in money, to a specified person or his order, or to bearer.

Particularities of checks

While the law relating to bills in general applies in substantial measure to checks, the Bills of Exchange Act, 1964 (Act no 34 of 1964) includes important sections on checks, which do not apply to other bills or to promissory notes. This Part is, however, not intended to be a lecture on checks, therefore only the most important particularities of checks will be dealt with.

Drawing of a check

The drawing of a check is simply the giving of a written instruction, which is signed be the person giving the instruction or his/her duly authorized agent, by a person to his banker to bay a sum of money certain in the amount to a third person on his/her demand.

Parties to a check

The definition of a bill, supra, implies the conjunction of three parties-the party who gives toe order, who is termed toe drawer; the party to whom the order is addressed, who is termed to drawee; and the party to whom payment is required to be made, who is styled either the payee (if a person is specified) or the bearer. The implied conjunction of three parties does not, however, require that those party to be three different persons. One person may be at one and the same time both drawer and payee, or even both drawer and payee, since a bill may be drawn payable to, or to the other of, the drawer, or it may be dawn payable to, or to the order of, the drawee. But as the order must be addressed “by one person to another”, it follows that there must be a minimum of two different persons, namely, a drawer and drawee. The former is identifiable by his signature to the order, while the latter is required to be named or otherwise indicated in the bill with reasonable certainty. As regards the parties, the sole distinctions between checks and other bills payable on demand is that in the case of checks it is essential that the drawee be a banker.

Banker’s duty to honour checks

When money is deposited into a bank account the bank becomes the owner of the money and the account holder a creditor of the bank, which now owes him the money. The account holder then has a right to claim the money from the bank. For this reason the bank credits the account and, whenever withdrawals are made, debits it.

The relationship between a banker and his customer is unique, but, as with all contracts, their relationship comprises reciprocal rights and obligations. One of the leading constituents of the contract between banker and customer is the duty of the banker to honor his customer’s checks when the account is in credit, or provision has been made for an overdraft. If a banker discharges this duty by duly paying a check drawn by his customer, he is entitled to debit his customer’s account with the amount so paid. On the other hand, if, in breach of his duty, he fails to discharge his obligation in regard to checks drawn by his customer, he will have no right to debit the account, and, in an appropriate case, he may incur liability in damages. Should a bank pay a check on which the signature has been forged, or after the account holder has instructed it not to pay the check (stop payment), it may not debit the customer’s account and will have to recover the payment from the payee.

Types of Check Fraud

Dishonour

A check is dishonoured by non-payment if, when it is duly presented for payment, payment is refused. Once this happens the hider of the check has an immediate right of recourse against the drawer and endorsers of the check. When a bank dishonours a check, it is returned to the depositor with any one of the following reasons for the dishonour indorsed on the face of the check:

Refer to Drawer.

This endorsement conveys that the drawer does not have sufficient funds in his account to meet the check and that no arrangements have been made for it to be met. In short it means, “We are not paying; go back to the drawer and ask him to pay”.

Insufficient funds

This means that there is insufficient money in the account to cover the check, or deposits have not yet been cleared for payment by the bank.

Post-dated

This means that the check has been dated for a date in the future. A bank is not entitled to pay a post-dated check before it’s due, nor to treat such a check as a bill presented for acceptance and to hold the customer’s funds to meet it.

Stale

There is no statutory or judicial sanction for bankers not to pay stale checks. There is, however, a condition in the agreement between the bank and its customer, whether express or tacit, that a check will be presented for payment within a reasonable period after the issue thereof. Where this period is not expressly stated in the agreement, or on the face of the check, the normal period is 6 months after the date of issue. If the check is not presented within that period, the bank will refuse to meet it.

Account Closed

The account has been closed and the bank has nothing further to do with the ex account holder.

Signature Differs

The signature on the check is apparently different to that appearing on the specimen signature card held at the bank. This may indicate forgery or fraud.

Not signed in accordance with mandate held 

On opening an account the bank and customer agree as to who may, and how many signatories must, sign the checks. Where a check is received which does not comply with this agreement the bank will dishonour the check.

Amounts differ

The amount for which a check is drawn up or made payable almost invariably appears twice on the face thereof, once in words and once in figures. In terms of the definition of bill of exchange the amount payable need only be expressed once in the body of the instrument. The insertion of the amount in figures is not a requirement but is a convenient practice for the purpose of reference. The amount in figures does not, however, become a material part of the check. Where the amount is expressed both in words and figures, and there is a discrepancy between the two, the sum denoted in words is the amount payable. It is, however, custom of bankers to return a check containing such discrepancy with the remark “Words and Figures Differ”, or simply “Amounts Differ”.

Alteration not signed

Where an alteration is made on the check the drawer must signify that he made the alteration by signing in full next to the alteration. Should this not be done the bank will return the check.

Payment Stopped

This indicates that the bank has received an instruction from the accountholder to withhold payment on a particular check or range of checks for a specified reason. This normally, but not invariably, indicates that the particular check, or range of checks, has been stolen. A bank may not withhold payment of a bank guaranteed check, even if the drawer may order it to do so.

Material or substance of a check

The Act does not specify any particular material or substance on which a check must be written. A check can thus be drawn on any material, not necessarily on paper. In practice, however, bankers print their own check forms and expect their clients to use these forms whenever they draw a check.

Hints and Tips

Fraud professionals have become increasingly skilled and sophisticated, thanks to advances in readily available technology such as personal computers, scanners and colour photocopiers. Criminals today can defraud you and your financial institution quite easily with a blank check taken from your checkbook, a cancelled check found in your garbage, or a check you mailed to pay a bill. Therefore, it is important to follow a common sense, logical approach with the way you use and store your checks.

Make sure your checks are endorsed by your financial institution and incorporate security features that help combat counterfeiting and alteration.

Store your checks, deposit slips, bank statements and cancelled checks in a secure and locked location. Never leave your checkbook in your vehicle or in the open.

Reconcile your bank statement within 30 days of receipt in order to detect any irregularities. Otherwise, you may become liable for any losses due to check fraud.

Never give your account number to people you do not know, especially over the telephone. Be particularly aware of unsolicited phone sales. Fraud artists can use your account without your authorization and you may end up being responsible.

Unless needed for tax purpose, destroy old cancelled checks, account statements, deposit tickets, ATM receipts (they also frequently have your account number and worse yet, your account balance). The personal information on it may help someone impersonate you and take money from your account.

When you receive your check order, make sure all of the checks are there, and that none are missing. Report missing checks to your bank at once. Should you fail to receive your order by mail, alert your bank. Checks could have been stolen from mailbox or lost in transient.

If your home is burglarized, check your supply of checks to determine if any have been stolen. Look closely, because thieves will sometimes take only one or two checks from the middle or back of the book. The longer it takes to detect any of your checks have been taken; the more time the criminal has to use them successfully.

If someone pays you with a cashier’s check, have him or her accompany you to the bank to cash it. If at all possible, only accept a check during normal business hours so you can verify whether it is legitimate. Make sure you obtain identification information from the individual Do not mail bills from your mailbox at night. It is a favourite location from which a criminal can gain possession of your check with the intent to defraud you. Criminals will remove a check from your mailbox and either endorse it using bogus identification, photocopy and cash it repeatedly, scan and alter the check, or chemically alter it.

The Post Office is the best location from which to send your bill payment. Limit the amount of personal information on your check. For example, do not include your Social Security, driver’s license or telephone numbers on your check. A criminal can use this information to literally steal your identity by applying for a credit card or loan in your name, or even open a new checking account.

Don’t leave blank spaces on the payee and amount lines.

Use dark ink that can’t be easily erased or covered over.

Don’t write your credit card number on the check.

Use your own pre-printed deposit slips, and make sure the account number on your slip is correct. Thieves occasionally alter deposit slips in the hope you won’t notice and the money goes into their account.

Don’t make a check payable to cash. If lost or stolen, the check can be cashed by anyone.

Never endorse a check until you are ready to cash or deposit it. The information can be altered if it is lost or stolen.

Businesses as Check Fraud Victims

It is widely believed that businesses are the primary targets of check fraud professionals – especially by organized rings of criminals. As far as counterfeiting and alteration, payroll checks appear to be a favourite although all forms of business checks are targets from time to time and all forms of fraud techniques are practiced as well.

Uniform Commercial Code – Who is responsible?

It is clear now that businesses must play a role in ensuring their checks are secure. Recently revised UCC regulations add the onus of shared responsibility for check fraud on the business. For example, if a bank offers their customer check stock that containing security features that could have prevented a specific case of fraud, the bank can claim that the customer was negligent and therefore at least partially liable for the fraud loss.

Check Fraud Tips

A combination of precautions that a business might undertake could greatly reduce the likelihood of check fraud. Poor internal controls may lead to collusion between employees or third parties who copy, steal, alter and forge checks.

Order checks and deposit slips wisely.

Use an established, respectable source, especially those recommended by your bank, to ensure your checks will process easily through the bank’s clearing system.

Make sure that your checks include Security Features that will help combat counterfeiting and alteration.

Make sure you notify your check supplier (and financial institution, if necessary) if a new check order has not been received within a reasonable amount of time after you ordered them.

Maintain adequate physical security of your checks, deposit slips, etc.

Secure all reserve supplies of checks, deposit slips and other banking documents in a locked facility. Keep blank checks locked up at all times and limit the number of people with access to your checks. If your checks fall into the possession of unscrupulous employees, you could be liable for substantial losses.

Change the locks on your facility when an employee leaves your employ.

Never leave checks or bank records unattended in order to assist customers.

Issuing and reconciling checks

Assign accounts payable functions to more than one person and make each one responsible for different payment areas. This division of responsibility makes it more difficult for employees to tamper with checks and payments.

Limit the number of official signers. The fewer check signers you have, the lower your chances are of being defrauded.

Require more than one signature on large dollar check amounts. In this way, any losses you may incur will be low denominations only.

Immediately notify the bank of any change to your accounts payable process and personnel. You don¹t want former employees who may have secreted some checks from your business to retain authorization to sign them after they have left your employ.

Separate the check writing and account reconcilement functions. Try not to have the same person who balanced the bank statement issue checks. This provides greater safeguards against an employee writing fraudulent checks and covering it up. The reconciler would be able to prevent the crime unless the employees are in collusion.

Reconcile your account promptly and regularly — quick fraud detection increases the likelihood of recovery. Businesses and personal consumers, who do not balance their accounts monthly and don’t find the discrepancies until months have passed, can become liable for losses.

Fraud Prevention Services (provided by the bank)

Use maximum dollar amounts on accounts to limit large denomination losses by authorized or unauthorized persons.

Set up a separate account of large dollar payments to keep fraud losses at low denomination levels.

Request detail reports for large dollar items to stay better informed. Increase fraud detection opportunities to find out whether you have a corrupt employee.

Use Positive Pay. This type of payment system records pertinent information about each check such as the amount, the check number, bank information and date, and then transmits it to the bank to be verified, before the check can be paid.

Employee relation’s policies

Make sure you know whom you are hiring to handle your money. Diligent reference and background investigations on all prospective employees are important so you know that you are not hiring someone with a past record of financial abuse.

Conduct random audits and enforce vacation policies.

Have your employees bond by means of evening out, weekend outings or team building exercises.

Identify Bad Checks

Below are several signs, which may indicate a bad check. While one sign on its own does not guarantee a check to be counterfeit, the greater the number of signs, the greater the possibility that the check is bad.

The check lacks perforations.

The check number is either missing or does not change.

The check number is low (like 101 up to 400) on personal checks or (like 1001 up to 1500) on business checks. (90% of bad checks are written on accounts less than one year old.)

The type of font used to print the customer’s name looks visibly different from the font used to print the address.

Additions to the check (i.e. phone numbers) have been written by hand.

The customer’s address is missing.

The information of the bank is missing.

There are stains or discolorations on the check possibly caused by erasures or alterations.

The numbers printed along the bottoms of the check (called magnetic Ink Character Recognition, or MICR, coding) is shiny. Real magnetic ink is dull and non-glossy in appearance.

The MICR encoding at the bottom of the check does not match the check number.

The MICR numbers are missing.

The MICR coding does not match the bank district and the routing symbol in the upper right-hand corner of the check.

The name of the payee appears to have been printed by a typewriter. Most payroll, expenses, and dividend checks are printed via computer.

The word VOID appears across the check.

Notations appear in the memo section listing “load,”, “payroll,” or “dividends.” Most legitimate companies have separate accounts for these functions, eliminating a need for such notations.

The check lacks an authorized signature.