5 Tips for Avoiding Losses When Working With the Bank of First Deposit

July 2, 2024

Not it! The back-and-forth financial institutions (FIs) often go through when determining liability can be exhausting and overwhelming. FIs must work within specific timeframes and abide by various regulations, adding complexity to the process. Check fraud affects both the originating financial institutions (known as the drawee bank or paying bank), where the check is drawn from, and the receiving financial institution (bank of first deposit or depositary bank), where the check is deposited.  

We’ve put together some practical tips on avoiding check fraud losses and assisting in recovery.

1. Check Fraud Claim Directory

The American Bankers Association (ABA) offers this valuable resource to financial institutions. This directory is a searchable database containing contact information for banks to use when filing a check warranty breach claim with another FI. Participation in the directory requires banks to provide their fraud contact information. ABA membership is not necessary to access this tool, making it accessible to a wider range of banks and even credit unions.  For more information, visit the ABA Check Fraud Claim Directory.

2. Know Your Rights

Familiarize yourself with the laws and regulations governing banking practices, such as Federal Reserve Regulation CC and the Uniform Commercial Code (UCC) in the United States. The UCC outlines the responsibilities and liabilities of banks and their customers. While the UCC doesn’t cover every possible check fraud scenario that FIs might encounter, it does provide a foundational framework for determining which party bears the loss. The UCC includes specific provisions that can alter the default rules under certain conditions. 

For example, section 3-406 states that losses resulting from forged or altered checks can be attributed to parties whose negligence contributed to the fraud.  Similarly, section 4-406 allows for the shifting of loss to account holders if they fail to examine their statements and detect unauthorized transactions promptly.  These rules help ensure a fair allocation of liability based on the actions and responsibilities of the involved parties, offering a structured approach to resolving check fraud disputes.  

You can leverage the Cornell Law website for a list of UCC codes.  Work with your FI’s legal team when determining liability and next steps.

Also, check out this case between Provident Sav. Bank vs. Focus Bank, which reinforces the nuisances of timelines and warranties when determining fault.

3. Expand Your Network

Oftentimes, having contacts at other banks can assist with recovery efforts.  Attend conferences, join other banking groups, and expand your network so that when in disputes, you have a person with whom you can contact directly and not just a 1-800 number.  It’s important to be good partners with other banks, too.  

Banks must work together to resolve disputes in a timely and proper manner.  If you’re dealing with a questionable item, try to reach out to the Bank of First Deposit before the item is fully negotiated.  They may not be willing to share information, but sometimes they will.  Clearly explain the issue and share relevant documentation.  Collaborate with the other bank to verify the check’s legitimacy, investigate discrepancies, and determine liability, ensuring all steps comply with relevant regulations.  Effective communication and cooperation can help resolve the issue swiftly and prevent future occurrences.

4. Document, Document, Document

Maintain good records when dealing with liability cases.  Ensure you have notes, copies of check items, and any other pertinent information pertaining to the case.  Oftentimes, getting legal to send a letter to the other bank can assist before having to pursue a lawsuit, especially with breach of warranty claims.  It’s important to keep track of the various items, banks, and recovery efforts and follow up on outstanding items as the bank may drag its feet in returning recovery funds.

5. Effective Fraud Prevention

In addition to monitoring check activity and offering tools such as Positive Pay, having appropriate check fraud detection software can assist greatly in preventing issues beforehand.

Unit21’s Check Fraud Prevention & Investigation solution helps eliminate manual effort, cuts down investigation time, and proactively flags fraud.  The solution uses dark web monitoring, finding stolen checks before they reach the bank by alerting suspicious activity on the dark web and telegram.  There are out-of-the-box check fraud rule templates, which allow institutions to detect check fraud within minutes without engineering resources.  The investigation toolkit is a full case management system that centralizes and automates all check transactions, historical deposits, and image comparisons in one place.  Lastly, the AI agent for investigations quickly understands the data and provides clear, actionable insights for each fraud investigation.

Understanding the complexities of check fraud and the necessary steps for prevention and recovery is crucial for financial institutions. By utilizing resources like the ABA Check Fraud Claim Directory and staying informed about relevant laws and regulations, banks can better navigate these challenges. Effective communication, thorough documentation, and expanding networks with other banks are also vital strategies in managing check fraud cases.

To see Unit21’s check fraud-fighting features in action, watch the Check Fraud product demo webinar. Discover how our advanced solutions can streamline your investigations and enhance your fraud prevention efforts. Watch the webinar here.

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