A Growing Fraud Scheme Your Financial Institution Should Be Aware Of, and How To Protect Against Losses BY SHELLI CLARKSTON, SPENCER FANE LLP Recently, financial institutions are facing large losses as a result of a growing fraud scheme. It is important for institutions to understand this fraud scheme and know how to protect themselves from potential losses. The fraud scheme begins when an individual intercepts a check in the mail. Typically, these checks are payable to a business. The same or another individual then forms an entity in a state with the same name as the payee business. For example, for a check payable to ABC Inc., the individual will set up a corporation in the name of ABC Inc. and will prepare the relevant corporate documents. The individual will then go into the institution and open a new account in the name of ABC Inc. The institution will obtain the Articles of Incorporation as well as a Certificate of Good Standing, corporate resolutions and Bylaws. The institution will then deposit the intercepted check into the new account. Sometime later, the actual payee eventually contacts the payor to report that it never received the check, and the payor contacts its financial institution only to be told that the check has cleared. The payor’s institution then submits a breach of transfer warranty claim to the institution of first deposit for fraudulent endorsement. However, the funds in the new account have been withdrawn. Financial institutions are left facing the issue of determining who is liable for the funds. The fraudster is ultimately liable for 14 In Touch
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