Protecting Your Bank Account From Fraud
Construction spending in the United States is estimated to exceed $1 trillion in 2016. This level of expenditure, while very good news for the industry, brings with it an array of risks including but not limited to field labor shortages, decreased productivity, competitive pricing, inexperienced project management staff and engaging more work than a company can effectively manage.
This level of spending and the increase of cash flowing through construction firms’ bank accounts increase the risk of fraudulent banking transactions. The large dollar volumes passing through contractors’ bank accounts gives fertile ground to attack to thieves looking to steal. As laws change, technology becomes more pervasive and inexpensive; and as thieves become more sophisticated, the need to protect our bank accounts from both internal and external fraud is of paramount importance. Therefore, you need to ask these two questions: “Has your bank account been compromised, and if it hasn’t, when will it happen? “Do you have the expertise you need to safeguard your bank accounts, or should you seek the advice of an expert?”
In this article, payment expert David Kurrasch explains ways contractors can protect their organizations from fraudulent charges to their bank accounts. David has an extensive background in treasury management, banking and payment processing. He has more than 35 years of experience in financial services and corporate cash management. His career includes time as a treasury officer at a Fortune 500 consumer products company, 15 years as the head of wholesale payment product management, and compliance for Wells Fargo bank. Followed up by 20 years running and operating his own cash management and payment consulting firm, Global Payments Advisors, Inc., Mr. Kurrasch earned a Bachelor of Arts in economics and communications from the University of Wisconsin-Madison and a Master’s Degree in finance from the American Graduate School of International Management, Glendale, Ariz.
Walls & Ceilings
For many years before 1992, American businesses typically operated on the assumption that they largely were protected from losses caused by fraudulent charges to their bank accounts. In fact, this was generally true until the Uniform Commercial Code was modified in 1992, which is when the concept of comparative negligence was introduced.
The UCC’s applicable provision now states as follows:
§ 3-406. NEGLIGENCE CONTRIBUTING TO FORGED SIGNATURE OR ALTERATION OF INSTRUMENT.
A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.
Under subsection (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.
(c) Under subsection (a), the burden of proving failure to exercise ordinary care is on the person asserting the preclusion. Under subsection (b), the burden of proving failure to exercise ordinary care is on the person precluded.
Under this revised language, while your bank may cover you for small fraudulent charges to your accounts as a means of preserving its relationship, that accommodation is not required by applicable law. Therefore, it is not certain that you will be protected against large or small instances of fraud in your accounts.
Consequently, it is very important that businesses understand the concept of comparative negligence. It is important that they anticipate its application, should fraud occur in their accounts, and that they do everything possible to eliminate or greatly reduce the likelihood that they are perceived to have inadvertently (or, for that matter, intentionally) permitted fraudulent transactions in those accounts.
Application of a comparative negligence standard to fraud in a bank account requires the allocation of responsibility for losses between the financial institution and its customer. This determination is based on the facts presented in each discrete circumstance and involves weighing the customer’s diligence in protecting itself against that of the bank, in seeking to avoid fraud.
This will involve a consideration of how diligent the account holder has been in protecting its check issuance processes from—and in reviewing its bank statements for—instances of fraud (see UCC §4-406(c) – (f)) for a discussion of the customer’s statutory obligations to review its bank statements and of the implications for its failure to meet those requirements). The level of that diligence, when compared with that of the bank in paying the applicable instrument, will determine the allocation of responsibility between them for resulting losses.
Easy Actions You Can Take to Reduce Assertions of Your Comparative Negligence
- Safeguard check stock preferably in a locked safe to which only authorized persons have access.
- Do not use signature stamps.
- Do not publicize your bank’s routing and transit number or your bank account number on documents or websites that can be distributed to unauthorized persons.
- Ensure that you have adequate separation of duties. Employees who produce check payments should be different from the employees who sign checks. Employees who produce and sign checks should be different from the employees who reconcile bank account statements.
- Be sure that you examine activity in your bank account every day.
While there are exceptions to this general rule, debits to your business bank account are considered settled and final 24 business hours after presentation. Therefore, if a $100 check or ACH debit is presented to your bank account on Monday and you are notified via on-line banking of the charge on Tuesday morning, you would typically have until the end of Tuesday to instruct your bank to return the check/ACH debit unpaid.
In addition, and in keeping with UCC §4-406(c) – (f), it is essential that you reconcile your bank account statement every month. However, we caution that your recourse on fraudulent transactions charged to your bank account will be much stronger if you identify and communicate improper entries to the bank quickly.
How Your Bank Can Help Protect Your Bank Against Fraud
Even if you take the above steps to protect your bank account, a thief only needs your financial institution’s routing and transit number (the nine digit number that specifically identifies the institution on your check’s MICR line) and your account number (which also appears on the face of your checks). With those two pieces of information, thieves can access your bank account by producing a fraudulent check or sending an electronic debit to your account.
So, what other actions can you take to protect your bank account from fraud?
Put the following controls on your bank account. (If you don’t use these services today, we recommend that you consult with your banker soon):
- Use Positive Pay to protect against fraudulent checks. Positive Pay is a tool offered by banks through which you deliver an electronic file of issued checks (date, check number, dollar amount, and payee name) to the bank. Often this file is delivered as part of an automated Account Reconciliation Service. The bank uses the electronic information to pay only those checks that have been identified by you as having been issued.
- If you have an account that isn’t used for check writing, use Post No Checks to ensure that no fraudulent checks will ever post to that account. This service, when implemented, will block the bank account against any checks being posted to the account.
- If you do write checks against an account, use Maximum Check Limits to establish the greatest individual dollar amount of checks that are allowed to post to that account. This service may not be needed if you use Positive Pay, but if your bank offers the function, it’s always a good idea to establish a limit for the dollar amount of any individual check that can post to your account in a given time period
- If you allow no electronic debits to be charged to your account, instruct your bank to put an Automated Clearinghouse block on it. This service makes certain that no ACH debits, including electronic checks, will be debited to your account.
- If you do allow some electronic debits to be charged to your account (for instance, the IRS for payroll taxes), then ask your bank to implement an ACH Filter. This service allows you to approve, in advance, only those ACH debits that you authorize. All ACH debits that do not meet the filter criteria you establish will be automatically returned, unpaid.
There is much more for contractors to learn about when it comes to protecting their bank accounts, managing cash flow, payments, and their banking needs. If you would like to receive David’s newsletters or attend a payment and cash management training for contractors, contact his associate Sharon Predes at firstname.lastname@example.org.
This article is provided for information purposes only, and is not intended to express legal opinions or to afford advice, whether legal or otherwise. You should consult an attorney or other applicable professional for assistance and advice on issues raised by this article.