- Toward the end of the 19th century, lawyers recognized the need for consistency in how banks handled banking transactions. In 1892, the National Conference of Commissioners on Uniform State Laws, consisting of lawyers from just seven U.S. states, met for the first time. The NCCUSL grew in influence during the next few decades and in 1951 it published the Uniform Commercial Code. The code included recommendations for state laws on check transactions. All 50 states now use the UCC as the basis for commercial laws.
- Traditionally most check fraud involved buyers writing stolen or altered checks to business owners. Since the creation of the Internet, international criminals have targeted Americans with scams that involve someone claiming to be a rich benefactor mailing a check to a supposedly long-lost relative. They claim to have accidentally sent too much money and instruct the payee to wire the over-payment back to them. People deceived by this scam usually wire their own funds only to have the check returned as a fake.
- Banks enforce strict rules to prevent check fraud. Employees must compare the signatures on presented checks with databases that contain samples of customer signatures. Banks normally require two forms of identification before cashing checks. Many banks also use an ink pad to take a fingerprint of the payee.
Banks cannot guard against well-known customers cashing third-party checks that are fake. The customer assumes responsibility for verifying the source of the funds when he signs his endorsement. - When a customer cashes a check drawn from another financial institution at her own bank, the bank gives her immediate credit even though the check has not been paid by the drawee bank. Having negotiated the check, the bank sends it through its own proof department, where checks are routed to regional Federal Reserve centers based on geographic origin. The Federal Reserve sends the check to the drawee bank, which, in the case of fraud, refuses payment. The check returns via the Federal Reserve to the payee's bank. This process often takes nine business days.
- State laws vary on the liability for losses due to fraudulent checks, but usually the bank holds the customer liable. Banks accept liability if operating procedures were not followed, but when established customers cash checks against their own accounts, banks pass the liability onto the payees. In instances when the customer cannot afford to return funds, the bank itself incurs the loss although typically banks take customers to court to try to recapture the money.
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