Timely Account Reconciliations

Are your departments, divisions, or agents reconciling their bank accounts on a timely basis? If you answered in the affirmative, are you absolutely sure? A Wisconsin man thought he was on top of things, but learned too late that his bank had shortened the timeframe to report unauthorized items and it cost him $130,000.

UCC 4-406 requires an account holder to exercise "reasonable promptness" in examining monthly statements and reporting unauthorized signatures or alterations. Under the revised UCC, now adopted by all states except New York and South Carolina, "reasonable promptness" is generally considered 30 days. Subsection (f) sets a one-year outside limit for reporting discrepancies or errors "without regard to care or lack of care of either the customer or the bank."

UCC 4-103 allows for contractual amendments of the UCC rules, provided the bank does not try to disclaim its own negligence. Many banks throughout the country have shortened the one-year timeframe for reporting discrepancies, and in light of the following Wisconsin case, many more are likely to do so.

The Wisconsin case isn't your everyday case (Borowski v. Firstar Bank Milwaukee, 1998). The account holder, Borowski, maintained two checking accounts with Firstar Bank-his personal account and an account for his father's estate. Borowski alleged that his fiance stole $100,000 from the estate account and $50,000 from his personal account, using forged checks, unauthorized telephone transfers, and forged handwritten notes that were left in the bank's night depository box requesting cashier's checks. When the monthly statements and $20,000 in cashier's checks were sent to Borowski, his fiance intercepted them. When Borowski discovered his loss of both money and faith, he sued the bank to get his money back. (We can presume he also called off the marriage, thus mitigating future financial outlays such as wedding expenses, divorce attorney fees, and alimony.)

In court, the bank moved for summary judgment based upon the signature card agreements on the two accounts. The personal account agreement required that the bank be notified "...of any unauthorized or altered item shown on your statement within fourteen (14) days of the statement date." The estate account required notification "...of an unauthorized signature or alteration on an item within 14 days after we send or make available to you your statement and items or copies of the items." The bank argued that these two specific provisions completely barred Borowski's claims. For his part, Borowski acknowledged that he had not reviewed the statements because his fiance intercepted them and then lied to cover their receipt. But he argued that the bank was negligent in the handling of his accounts.

The court ruled in favor of the bank. It found that Borowski's failure to reconcile on a timely basis because of the deception of his betrothed was irrelevant as long as the bank had mailed the statements to the customer's proper address. The burden of receipt falls upon the customer. The issue of alleged bank negligence was deemed irrelevant because the shortened timeframe to report errors was an allowable contractual variation of the one-year rule, which the bank had made part of the signature card agreement. However, the court did rule in favor of Borowski regarding the $20,000 in cashier's checks that were issued on the basis of fraudulent hand-written notes, because the bank failed to make those notes available with the bank statement.

Solutions
1. Read and understand all contracts, including the small print in signature cards. It is abundantly clear from recent check fraud-related court cases that a bank's intentions must be clear and unambiguous. Accordingly, banks are re-writing their signature card agreements and are including new provisions and requirements for the account holder.

2. Reconcile all bank accounts immediately. If staffing levels or vacations preclude reconciling within a few days of the receipt of the bank statement, hire an outside agency to perform the reconciliation. Independent reconciliation service providers, CPA firms, and many banks offer this very valuable service. If you find that your reconciliations are not completed within 30 days more than twice a year, you are a candidate for an outside reconciliation service provider. When reconciling the accounts, if check volumes allow, fanfold the returned checks and look for variations in the color of any of the checks. Color variations in paid checks almost always indicate physical tampering or a fraudulent check. Some companies with multiple divisions or branch locations have a single account that all checks pay against. To differentiate the checks, they use a different color of check for each branch. I strongly advise against this practice because spotting variations in check colors, something every bank Sight Review staff person is or should be trained to do, becomes impossible. Use no more than two colors of checks for one account, perhaps varying the color based upon even and odd branch numbers. If your check volume is too large to fanfold or physically review, speak with your bank about Positive Pay, a service offered through its Cash Management Department. But Positive Pay is not foolproof; it cannot catch altered payees. Checks with an altered payee can often be visually detected if your checks are highly secure and are reactive to many different chemicals.

3. If a check fraud loss does occur, whenever possible file a 1099 on the perpetrators and let them deal with the IRS for the rest of their natural lives. It is extremely doubtful that Borowski's fiance filed a tax return that included her illicit gain, and so perhaps this story isn't finished yet. As Al Capone found out, you can run but you cannot hide...