Scams

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. icon
    Jay (profile), 28 Dec 2010 @ 9:08am

    A few points

    I'm going to intervene here. First, yes, this scam can work because there are a number of people who bring in weird checks from everywhere. Just like the TSA, you can't catch every fraudulent check.

    Having been a bank teller, I can assure you, no matter how good you are, no matter how much you look, you can't catch every one.

    The specific laws I believe are in the Community Reinvestment Act along with the Federal Reserve Act. While that money is allowed to be available, you can have a hold placed on it. Then, there's rules on whether the check is from the same state or not! And with all of these holds, you have to remember that approximately 15-20 days after you've started, that money is released.

    The problem again comes when, as others have mentioned, the back office can catch up with you.

    We won't get into other problems such as fraudulent money, ACH laws, and all other sorts of fraudulent activity.

    The point is, no matter how much you warn someone, it may not be enough.

    I've had at least one person get mad at ME for my warning to him. He'd received a check for a large amount (over $2K) where the check had been deposited. Then, I tell him how a scam operated. He proceeded to take the money out of his account and Western Union the money in another area.

    A few hours later, he comes back because the WU folks told him about the same scam. I do further research into the check and find out that it was a bad one. Yes the money was processed, but the check was going to come back negative. All the while, it's my "fault" because I told him that hey, it takes a little bit of time to check these things and you may want to wait.

    I would seriously consider the banking side before faulting them for the effectiveness of this scam.

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