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Banks Honor Bogus Checks and Scam Victims Pay

By Caroline E. Mayer
Washington Post Staff Writer
Thursday, June 1, 2006

Trying to sell his 1968 Mustang online, John Schaefer received what appeared to be a firm offer from an overseas classic-car dealer. The buyer sent Schaefer a check for $14,000 even though Schaefer was asking only $8,000. The buyer said the extra money was to cover shipping and directed Schaefer to wire him the difference.

"It seemed kind of funny, and I had some hesitation," said Schaefer, who deposited the check in his bank's ATM over the weekend. On Monday, he asked a teller to see if the check was good. She left her perch, went to the backroom and returned assuring him "there was no problem," Schaefer recalled.

On Wednesday, "still not feeling quite right," Schaefer asked the same teller to make sure the check was good. That time, the teller told him the check had been cleared and he was "all set." Schaefer withdrew $5,000 and wired the money to the buyer.

Four days later, as he reviewed his account online, he discovered the check was not good. Even worse, the bank was demanding that he repay the $5,000.

"Had I made the deposit and not tried to make sure it was legitimate, I should have full obligation to make good on it," said Schaefer, 34, a facilities manager in Brattleboro, Vt. "But I checked with the bank twice, and now I find out they have no accountability."

Schaefer is one of thousands of consumers who have been victimized by an increasingly common check scam that relies on the vagaries of the banking system to take advantage of unsuspecting consumers.

Federal rules require banks to release funds from a consumer's deposit quickly, usually within one to five business days, depending on the kind of check. However, it can take weeks before a bank discovers a check is fraudulent.

So when a teller says "the check has cleared," the teller is "usually thinking in terms of bank rules, that the hold time is over, and the consumer now has access to the funds," said Susan Grant, director of the National Fraud Information Center.

But the average consumer thinks that phrase means "the check is not fraudulent," Grant added.

When that happens, it is depositors who are responsible for the money, she said. As the American Bankers Association explains in a "Fraud Alert!" statement insert it distributes to banks to send to customers: The consumer is the one dealing directly with the person who sent the money and therefore is "in the best position to determine how risky the transaction is."

To facilitate the flow of funds behind the 40 billion checks processed each year, banks are required to release funds within a few days, said Nessa Feddis, senior federal counsel for American Bankers Association.

If tellers start asking a lot of questions or start holding checks until they are determined to be good, banks "might be perceived as trying to circumvent the rules entitling people to withdraw funds," Feddis added. And if the banks are wrong, it will only be a matter of time before they are hauled before Congress and "accused of trying to hold on to people's funds," she said.

That provides no comfort to those who have gotten caught in scams. "I want security more than fast check-cashing and money flying all over the place," said Toni Gaston, a New Jersey administrative assistant who was the victim of an Internet work-at-home scam earlier this year.

In February, about a year after Gaston had posted her résumé on a job-search Web site, she received an e-mail about a part-time opportunity: to work as a courier for money for an international charity that builds homes for people in disaster areas. Her assignment was to deposit local donations into her own bank account, wait for the checks to clear and then wire the money to another address. She was told she would be paid 7 percent of every donation check, with a guarantee of $500 the first week on the job.

Gaston received a $4,500 cashier's check on Saturday, Feb. 26, and immediately deposited it in her Bank of America account. The teller told her it would take three days for the check to clear. On Wednesday, Gaston reviewed her account online and saw the funds were in her account. "I assumed, since it was a cashier's check, that Bank of America had actually gotten money from the other bank and put it into my account," she said.

On Thursday, Gaston withdrew $2,000 and wired it to a Ukrainian address. That's not unusual since most of these scams direct money outside the United States, often to Canada or Nigeria. The next day, Gaston followed instructions from another e-mail directing her to wire $1,900 to a different Ukrainian address.

"I couldn't believe I could make this much from this little bit of work," Gaston said. It was only a few days later that Gatson's euphoria wore off, when she caught a snippet of a TV news story about a person who had been scammed by an identical work-at-home scheme.

"My face turned completely green," said Gaston, who called the bank immediately. Bank officials told her there was nothing the bank could do and warned her that she would have to repay the $3,900 when the counterfeit cashier's check was finally returned to the bank.

It took another month before that happened. By that time, Gaston had surfed the Internet and learned there were hundreds of other victims around the country. She was furious. "The banks know this is going on. They know people are compromising the bank system, so why don't they upgrade their security, train their tellers to spot the counterfeit checks?"

According to Gaston: "A bank vice president told me that the bank cashes so many checks a day it doesn't have time to do that. I thought my money was safe. . . . I should have stashed it in a mattress."

Bank of America spokeswoman Diane Wagner said privacy rules prohibit talking about Gaston's case. However, in general terms, she said, "We advise customers to know with whom they're doing business. We also tell them they should never agree to wire back funds to a person they're not familiar with."

Wagner and other bank officials around the country all note that both the deposit receipt and the initial agreement customers sign when setting up an account make it clear that if any deposit item is returned, for any reason, the customer is responsible.

Bank of America's deposit receipt, for example, says: "All items are credited subject to verification, collection, and conditions of the Rules and Regulations of this Bank and as otherwise provided by law."

For most consumers, that language is clearly not enough, said Shawn Mosch, who launched a "Scam Victims United" Web site after she and her husband fell victim to a counterfeit check scam when they tried to sell a 1961 Buick online. Begun in 2003, Scam Victims United now has 2,616 members registered to its message board of 4,000 postings.

"There ought to be a law that says banks can't release the money until the check is guaranteed to have cleared -- or the customer is willing to sign a release realizing it is his/her responsibility if the check turns out bad," Mosch said. "Had there been something like that for me when I was a victim, I would have said, 'Oh wait, you mean we're not guaranteed here?' . . . We didn't trust the guy we were selling the car to, but we trusted our bank to tell us the truth. . . . I specifically asked the teller, 'I want to make sure if I do anything with this check it won't come back and bite me,' and the same teller assured me three times there was no problem."

Bank officials say it is not possible to warn each and every consumer about potential scams. "Everybody is in a hurry, so if we made such a disclosure with each transaction about every responsibility the depositor has, we'd be there all day," the ABA's Feddis said.

Besides, Feddis added, the proportion of fraudulent checks is very small, fewer than 100,000 out of the 40 billion checks processed annually. But the numbers are growing. According to the suspicious-activity reports banks file with the federal government, the number of fraudulent and counterfeit checks totaled 88,986 in 2005. That's more than triple the 28,670 reported in 2000. Between 2004 and 2005 alone, the number of reports of fraudulent and counterfeit checks grew by 45 percent.

Driving this increase is the Internet, which has made it easy for scammers to reach an ever-widening circle of susceptible consumers. "Because you're on the Internet in the comfort of your home, you may not realize the dark alleys you're dealing with," said John Hambrick, the FBI's unit chief at the Internet Crime Complaint Center.

Banks say they are trying to be more proactive, alerting their customers to those dark fraud-filled alleys through statement inserts and posters.

"Banks could do a better job," added Grant of the National Fraud Information Center. Among other things, she said, they could improve technology to catch fraudulent checks faster and be more upfront with customers about the risks.

"For example, when a customer says, 'Has this check cleared?' it's an opportunity to say the hold period is over and now you can have access to the money, but that doesn't mean the check or money order is good. If it bounces, you will still be responsible."

Even so, Grant added, consumers need to be vigilant, too. "And there's one sure way consumers can avoid a scam: Anytime anyone asks you to wire them money, that's all you need to know."

Schaefer learned that lesson the expensive way with his Mustang. He eventually sold it "to a gentlemen in Massachusetts," he said, adding, "He paid cash."

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