Targeted in online check scam, FTC sues

CEO says site not to blame
When MSNBC.com first wrote about Qchex, James Danforth, CEO of the site's parent company, Neovi Data Corp., conceded that some fraud occurs from criminals using the site. But he said the overwhelming number of customers are legitimate and argued that the site is no different from hardware and software that allows consumers to print their own checks at home. 

"Anybody could take any check in America and commit fraud," Danforth said. "A check is a very simple document to reproduce."

The site itself acknowledged the threat of illegal use, urging consumers to register their checking account numbers before they are claimed by a criminal.

“Registering your bank accounts with Qchex ensures no one else can set up or access your account numbers on the Qchex system,” it advised in its instructions.

In its motion in support of a temporary restraining order request, the FTC said Qchex still does not adequately verify its users.

"Defendants did not and still do not require a customer requesting those services to demonstrate that he or she has authority to write checks on an identified bank account," it said. "As a result of defendants’ failure to verify their customers’ authority to write checks drawn on identified accounts, defendants have created and delivered numerous bogus checks for fraud operators. ... Anyone could open a Qchex account with any bank account number and Qchex would create and deliver checks for them."

Lack of verification blamed for ‘substantial injury’
The motion says Qchex has refused to add verification procedures to its site, indicating the company has "persisted in their course of conduct, even after being notified repeatedly and from numerous quarters of the substantial injury it causes."

Federal regulators have been eyeing Qchex for some time. In July 2005, the Federal Deposit Insurance Corporation issued a warning to member banks about fraudulent Qchex checks. At the time, Danforth told the FDIC that the site was processing several thousand transactions every week, the FTC complaint says.

In response, Danforth told regulators that Qchex would add a number of systems to improve the site's security. But in its motion, the FTC alleges that those systems had loopholes that were easily abused by criminals.

The federal government also has taken action to tighten rules on demand drafts.

The Federal Reserve last year adopted an amendment to its checks regulations that makes the bank that cashes a demand draft liable for losses if it is fraudulent. Previously the bank that had the account the check was drawn from was liable.

The new regulations went into effect in July and it is not yet clear if the change is stemming fraud using demand drafts.

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