Lessons from Losses: U.S. Treasury Check Fraud

Author: Debra McManigle

I thought I would share the following recent claim story.  Depending on what carrier an institution is with, it can determine if there is a potential for coverage under a financial institutions Bond.  No two FinaFinancial Institution Bond For Lending and Depository Institutionsncial Institution Bond policies are the same and the timing of a reclamation also plays a role in determining coverage in some carrier policies.

Client Study: U.S. Treasury Check Fraud

A financial institution reported a check fraud claim involving a series of U.S. Treasury checks that were accepted for deposit at the financial institution with forged endorsements. Between July 16, 2024, and August 16, 2024, eight different accounts were opened at various branches of the financial institution. The opening deposit for each account was a U.S. Treasury check. Each of the persons opening accounts had addresses in a state other than the institution as well as driver’s licenses in a state other than where the institution was located. Each person claimed that they were moving to the state that the institution was located.

The institution began receiving reclamation notices in connection with eight of the checks. Surveillance footage indicated that this was the work of the same fraud ring with individuals traveling in the same vehicle. Two accounts were opened by the same person under two different names at two different branch locations. The largest check was over $1 million dollars while the other checks ranged from $25,000 to $50,000.  

Reclamations from the US Treasury were received on all except one of the checks. The reclamation for the +$1 million check was timely, however there was only $300,000 left in the account when the reclamation was received. The institution proceeded to freeze what was left in the account. The total loss to the institution was over $500,000. The loss related to a few checks where the Treasury was not timely in sending their reclamation fell below the Bond Policy deductible.

Understanding Coverage Limits

Many Financial Institution Bond policies contain what is called a “not finally paid exclusion”.  This exclusion bars coverage for loss resulting from payments made or withdrawals from a depositor’s account if the item of deposit is not finally paid for any reason. There may be some coverage for loss related to checks where reclamations were not received in a timely manner based on rules promulgated for the final payment of U.S. Treasury or Government Checks.  

Some Financial Institution Bond Policies have wording called “a carve-back” in their not finally paid Exclusion, which provides coverage for U.S. Government Checks which are returned to the bank by the U.S. Government for any reason after the funds for said checks or drafts have been remitted to the bank or credited to the institution’s account.

For the purpose of this claim scenario, the institution’s Bond policy did not provide a “carve-back”. Furthermore, in this case, final payment of these U.S. Treasury checks was governed by 31 CFR | 240.6. Any credit issued by a Federal Reserve Bank to a financial institution shall be provisional credit until the Treasury completes its first examination of the check. The Treasury shall have a reasonable amount of time to complete the first examination and if they have not declined payment on a check within 60 days after the check is presented to the Fed, the Treasury will be deemed to have made final payment on the check.

Steps to Consider When Accepting Treasury Checks

Regardless of where there is coverage for this type of fraud, Financial Institutions should consider the following Loss Control steps when accepting Treasury checks, especially from new customers.

1. Don’t allow for new accounts to be opened with the use of a U.S. Government Check given the inability to hold funds vs. the lengthy timeline in which the government has to submit a reclamation.
   
2. If the institution allows a new account to be opened with a U.S. Government or Treasury check
   1. Set a threshold dollar amount
   2. The dollar amount could be what the institution’s tolerance to risk is for self insuring this type of loss.
   3. Set a dollar amount below the Bond Policy Deductible
      
3. Do not allow for new account opening with U.S. Government Checks for people who present out of state ID or license.
   
4. For already established accounts, disallow U.S. Government Checks on accounts that are less than 90-120 days old and that show no signs of sufficient funds or regular activity.
   
5. If possible, do not allow funds transfers/wires on accounts where U.S. Government Checks have been deposited and the timeframe in which reclamations on such checks has not expired, as well as when a U.S. Government Check is the only activity or presents the majority of the activity on the account.
   
6. In all situations, prior to releasing the proceeds of a U.S. Government Check, the institution must make all reasonable efforts to ensure that the check is an authentic U.S. Government Check. This is a condition of coverage in some FI Bond Policies.
   
7. Retain the original Treasury checks for three years after imaging. You may need to refer to the original check to detect an alteration if you receive a notice of reclamation claiming the credit union accepted an altered Treasury check.
   
8. Refuse Treasury checks presented more than one year after the issue date. 
   
9. Verify all of the security features on Treasury checks. Refer to U.S. Treasury Check Security Features. 
   
10. Carefully examine Treasury checks for evidence of alterations, such as cloudy or bleached areas in the payee and dollar amount areas and different fonts and sizes. 
    
11. Avoid accepting third-party Treasury checks since the bank would be responsible for the loss if the payee’s endorsement is forged. Avoid accepting a Treasury check that is jointly payable to two or more payees unless the account is titled in the names of all payees and the check is properly endorsed. 
    
12. Verify US Treasury Checks using the Treasury Check Information System (TCIS) 
    
13. For deposits made through remote deposit capture (RDC) by new customers consider stepping up your procedures for manually reviewing check images. You will not be able to verify the security features on Treasury checks deposited via RDC. 
    
14. Re-visit your check hold policy on deposits made at nonproprietary ATMs. Regulation CC allows for a five-business day hold on deposits made from nonproprietary ATMs. 
    
15. When opening new accounts, screen new customers through an identity verification solution. If there are any doubts as to the true identity, consider using a more robust solution, such as a skip trace solution. 
    
16. If you receive an incoming ACH stimulus payment and the customer’s account is closed, your best course of action is to return the ACH credit as Account Closed (return reason code R2). The Treasury’s rules require financial institutions to return an ACH payment when the recipient’s account is closed (refer to chapter 4 of the Treasury’s Green Book).

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Frequently Asked Questions About Financial Institution Bonds and U.S. Treasury Check Fraud