Easy check fraud technique draws scrutiny

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Bob Sullivan

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New regulation might help
While the Fed's Walton wouldn't comment on Qchex, he did say that a rise in complaints about demand drafts led to the proposed new regulations. Currently, demand drafts are regulated by a patchwork of state laws called the Uniform Commercial Code.

In most states, consumers who complain about a bad demand draft within a reasonable amount of time are entitled to a refund from their bank. The liability for accepting a bad check falls to the account holder's bank, called the paying bank, because in the past it was deemed to be in the best position to detect fraud.

But the rules only give the bank 24 hours after receiving the check from the institution that cashed it to make a fraud determination. That makes the work of con artists easier since banks rushing to make quick judgments often don't detect fraudulent demand drafts until a consumer complains, well after the 24-hour period.

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With its new proposal, the Federal Reserve would set a new nationwide standard that would put the liability on the bank that cashes the demand draft in the first place, putting the burden on that bank to check its authenticity. In addition, the paying bank would have 60 days to return a bad check, similar to rules governing electronic payments. And consumer rights would be spelled out more specifically, as with electronic transfers such as debit card payments.

While the National Association of Attorneys General maintains that demand drafts are archaic, and accomplish nothing that electronic payments cannot do, Walton, of the Federal Reserve, dismissed the idea that they would be banned and dropped. Few payment systems ever completely disappear, even after they fall out of vogue, he said.

"There are many legitimate uses for demand drafts," Walton said, adding that even if they were eliminated, criminals would just switch to another method of thievery. "Ultimately, they will switch to something else. ... Bad actors can game any system."

What consumers should do
The irony of the demand draft system is that it may mean that simple, old-fashioned paper checks are ultimately more risky to use than an electronic payment. Walton said they are at least of equal risk. "Paper does inherently go through a lot of hands," he said. And every person who handles a check has the ability to commit check fraud.

Herd said consumers should realize that checking account numbers are just as valuable to criminals as credit card numbers and should be treated with similar care.

McNamara's brush with banking fraud left her spooked, she said. She said she had no idea someone could print checks using the organization's account numbers and now has stopped writing checks.

“I'm scared to do anything now,” she said. “Anyone sitting in an Internet cafe in Lagos or Moscow can enter your checking account number on [the Internet] and begin forging checks.”

Bob Sullivan is author of Your Evil Twin: Behind the Identity Theft Epidemic

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