by Mike Masnick

Filed Under:
banks, checks, clearing, scams

Shouldn't We Fix The Check Clearing Loophole That So Many Scammers Abuse?

from the simple-questions dept

Slashdot points us to a recent story about a guy who lost his lawsuit against a bank, over a variation on a classic Nigerian email scam. The scam is one we've discussed many times in the past: somehow the victim gets a big check, which they're expected to deposit in a bank. After the check "clears," the victim/recipient is supposed to transfer a large chunk of that money to the scammer, on the belief that they get to keep whatever is left over. What really happens is a few days after the check "clears," the bank finds out it's fraudulent, and tries to void the transaction. But, by then, the victim has already transferred out a big chunk of money (and the scammer has already taken all that cash out of the bank and disappeared) -- leaving the victim footing the bill, with the bank expecting them to come up with the missing cash. In this case, the scam took on all the familiar facets of this scam:
In March 2009, Brian Peters received an email from someone purporting to be a citizen of Malaysia. The e-mail informed Peters that certain third parties in the United States and Canada owed the purported Malaysian money, but that "they can not transfer the funds to any bank account outside America continent due to their new company policy [sic]." He asked Peters to "assist me in receiving the funds and forward to me." He offered to pay Peters 12 percent of the money. Peters agreed after apparently negotiating an increase of his fee to 15 percent.

Peters deposited the $808,988.90 in checks received from the purported Malaysian at Chino Commercial Bank. After the bank notified Peters that the checks had cleared, Peters wire transferred $468,000 to Hong Kong. Shortly thereafter, the checks were dishonored after the bank detected that they had been altered. Since Peters was personally liable for any overdrafts on the account, which had only a few thousand dollars, the bank sought to attach property owned by Peters to collect on the overdraft. The trial court granted the bank’s motion to attach against Peters in the amount of $458,782.60.
This certainly isn't the first such lawsuit. We wrote about a similar case two years ago, which involved some scammers tricking a law firm (who really should have known better). The reason this scam works over and over and over again is pretty simple: most people have no idea that when a check "clears," it's not actually been validated. This is apparently due to various laws that require banks to make money from checks available within a very short period of time. So the way banks deal with this is to just make the money available, and if they later find out that the check was fraudulent, they pull back the money. But, of course, most people don't know this and assume (somewhat reasonably) that if a check "clears" and the money is listed as "available," the bank has made sure the check is legitimate. This is a somewhat unintended consequence of laws to make paying by check work better, but it leads to a huge opening for these types of scams.

So if they need to do that, shouldn't it make sense for banks to at least put forth pretty clear warnings on money that has not really been validated yet? Or to at least proactively warn anyone seeking to withdraw money that hasn't really been validated that if the check fails to validate, they may be liable? It seems like there must be better ways to deal with this kind of scam than to just let the scammers keep taking advantage of this knowledge gap.

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  1. identicon
    MD2000, 28 Dec 2010 @ 8:14am


    The simple fix - without invalidating the entire chequing system - is pretty simple. Most of these frauds involve some form of cashiers cheque or similar "anonymous" cheque. Make these "hold until verified".

    I recall there was a similar case about 2 years ago, where the patsy was someone who got a big cheque for some ebay sale like $2000 for a $500 item, "and send me the excess money". They insisted on asking the bank 3 ways from Sunday "this cheque is good? I definitely have the money?" and the bank personnel said yes. When they tried to renege a few weeks later, they lost the case in court.

    I guess it depends on what words you use to assure the client the cheque is OK.

    I think a bank stupid enough to cash a cheque for $800,000 written by a random stranger, totally out of pattern from the client's usual banking habits, without fully verifying it was correct, deserves to lose their shirt.

    The "trust" that banks work on is based on normal behaviour - GM or McDonalds is not suddenly going to bounce a million-dollar cheque to make $500,000 but Joe Schmoe who just opened an account might. If they have software that can detect that I'm trying to scam their credit card out of $400, why can't the same software detect this sort of fraud?

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