Check Fraud Claim Scenario: Lessons From Losses

  • August 6, 2024
  • 6 min read

Written by: Debra McManigle

You have a well‐known customer, Sue Smith, who met her boyfriend online. Sue and her online boyfriend are going to buy a house together. Sue gives her personal information to her boyfriend who tells Sue to open an account with ABC Bank and to be sure to order checks. Once the account was established, Sue received her new checks. Sue’s boyfriend instructed her to cash and/or deposit these checks into an ATM into her account with her primary financial institution.

At no time during the next 8 transactions, does Sue have funds initially or thereafter to cover the checks below, but Sue is a good customer so the ABC Bank Checks should clear, right?

  1. Sue presents a check for $4,250.00 at her bank’s drive‐up branch in town on 12/04/2020. The check was cashed at 4:09 P.M that same day.
  2. Sue presents a second Check for $9,750.00 which she deposited the check in her banks ATM in town on 12/04/2020 at 5:35 P.M. Sue then entered another branch of her bank and withdrew the funds on 12/05/2020 at 8:46 A.M the next day.
  3. Sue presents a third check for $9,450.00 which this time was presented for cash at the main office of her bank on 12/07/2020. Transaction occurred on 9:45 A.M
  4. Sue presents a fourth check for $30,000.00 which she cashed at the bank’s main office on 12/08/2020. The transaction occurred at 8:38 A.M.
  5. Sue presents a fifth Check for $30,000.00 which she deposited into the bank’s ATM on 12/07/2020 at 9:14 A.M. Once these funds were made available at cutoff time 6:00 P.M on 12/07/2020 Sue transferred the funds into another internal account at the bank at 6:39 P.M. and proceeded to withdraw the funds on 12/08/2020 at the same time as check number 4.
  6. Sue is not done. Sue presents a sixth check for $40,000.00 which was cashed at her banks’ main office on 12/09/2020. The check was cashed at 10:37 A.M
  7. Sue presents a seventh for $35,000.00 which was cashed, again at her bank’s main office on 12/10/2020. The Check was cashed at 8:39 A.M.
  8. Finally, Sue presents an eighth for $55,000.00 which she deposited into her bank’s ATM located in town on 12/09/2020 at 10:40 A.M. Once these funds were made available at cutoff time 6:00 P.M on 12/09/2020 $55,000.00 was transferred into another internal account at 6:31 P.M. these funds were withdrawn on 12/10/2020 at the same time as check number 7.

When the checks drawn on the account at ABC Bank were returned, the bank contacted Sue as her account was overdrawn. Sue indicated she was to send funds overnight through the UPS and purchase bitcoin. With the purchase of bitcoin, she sent a picture of the receipt that had the wallet address of the transfer. Sue was following the instructions of her boyfriend, accountant and realtor; who she met online.

Conclusion: THIS TYPE OF LOSS IS GENERALLY NEVER COVERED UNDER A BANK’S FINANCIAL INSTITUTION BOND!

Financial Institution Bond policies contain what is known as the “not finally paid” exclusion, therefore this claim was not covered under the Check Forgery & Alteration Insuring Clause. Looking at the Check Kiting Insuring Clause, there was no coverage in this case as the bank could not prove that their customer committed this fraud as a clear and obvious plan to defraud the bank.

“The Know Your Customer” Policy sounds nice and maybe years ago before the world turned slower, this type of accommodation panned out. However we really don’t know our customers when they purposely commit fraud or unknowingly fall victim to fraud. Knowing your customer does not prevent large losses from hitting your bottom line and in this case, there was no support from law enforcement who sided with the customer who claimed she was a victim of an online scam.


Could this bank have prevented some or all of this loss? Absolutely!

I asked my client the following questions and here were their responses. We hope that this experience helps your institution to strengthen its controls to mitigate costly claims.

Does the bank use any type of fraud software to detect unusual activity on customer accounts? If yes, did this matter show up and what actions were taken?

The bank did have software to detect unusual activity. The program; Financial Crime Risk

Module (FCRM) through Fiserv. Apparently since the bank’s customer was cashing checks,

depositing checks into the ATM and in some cases, transferring funds to another internal

account, the system did not detect all the activity to be associated with her. The program

relies on account activity or social security number association to determine suspect activity. Until the items started hitting her accounts, the software wasn’t able to create a suspect alert.

Note: Fraud detection services should be in place to catch this type of activity.

Does the bank have a hold policy or threshold where checks of a certain amount or larger or for checks drawn on other banks are held or sent for collection?


In this bank’s case, the bank relies on a “know your customer” system and has no standard policy for holds. For an unknown customer, the following steps are followed: a search of their database is conducted to see if they have had other checks processed from the

originator, a review of the customer’s account for activity to see if the liability for loss is low. Once staff has completed their due diligence then a determination on the hold process is made.


Note: Holds should be placed, particularly when there are not sufficient funds to cover the checks. 

Despite the above procedures, how did this customer accomplish cashing checks while not having funds to cover any of the checks and was able to cash 8 checks in a short period of time? Also, it seems extraordinary that anyone would deposit a $40k or $60k check by way of an ATM.

We all ask that question. This customer is a known and trusted individual to the employees of the bank. She works at a law firm within one of the bank branches.

When this customer came in to cash a check, she beforehand would make a deposit into the ATM before 6pm, then the funds would be available that night to transfer into another account, without doing more research, it would to look like she had funds to cover the checks she was cashing. When the first check was returned without payment, all activity had already occurred and the customer contacted.


Key Takeaway

Age-old bank policies and procedures related to fraud prevention are effective and should be implemented and followed.

Tellers should be trained to be wary of individuals that attempt to distract them or convince them to make exceptions so that they can pass ad checks. If the customer is demanding or unruly, the teller should be instructed to seek assistance from their “go to person”. send checks for collection while a hold is in place. reg cc allows for holds that would have given time for these checks to fail clearing.