Illinois bankers are urging federal regulators to crack down on check fraud by forcing big banks to resolve bad check disputes in a timely manner.
The Illinois Community Bankers Association calls on the Federal Deposit Insurance Corporation, the Federal Reserve, and the Office of the Comptroller of the Currency to issue supervisory guidance for large financial institutions to reimburse other banks for altered checks fraudulently within 90 days.
It is highly unusual for banks to request guidance from federal regulators on other banks. But check fraud has become so pernicious that it has led community bankers to raise concerns about compliance with Know Your Customer rules, a legal requirement for financial institutions to establish a customer’s identity. The Illinois trade group provided a list of the “worst culprits”: large banks and credit unions that routinely fail to respond to bad check disputes.
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“We want action, we want something done,” said David Schroeder, senior vice president for federal government relations at the Illinois Community Bankers Association, who sent a letter this week to prudential regulators. “This is a huge banking problem and it is affecting small community bank customers who are the front line victims of this fraudulent activity.”
Schroeder described a crime cycle in which check fraud has become so common in the financial system that small banks take on big ones. The banking trade group named names: Bank of America, JPMorgan Chase, Wells Fargo, Navy Federal Credit Union, US Bank, PNC Financial Services Group, Truist Financial, Capital One Financial, Regions Bank and Citigroup are institutions that repeatedly fail to refund bad checks ..
Federal regulators generally do not get involved in bank-versus-bank disputes. The Fed, FDIC and OCC declined to comment.
“We certainly believe that regulators have a responsibility to address this issue,” Schroeder said.
The big banks declined to comment or did not respond to a request for comment. Only Navy Federal Credit Union responded, saying through a spokesperson, “Navy Federal works diligently to help protect our members from fraud and works closely with law enforcement to hold perpetrators accountable.”
Community banks have been whining for the past two years that their big bank counterparts show no urgency or professionalism in resolving fraudulently altered check claims. Small banks say they can’t even find the right person or department at a big bank to determine if their complaints have been received. Rampant check fraud indicates flagrant violations of the Know Your Customer rules which were created in 2014 by the Financial Crimes Enforcement Network to help prevent identity theft, money laundering, financial fraud and other financial crimes, say the bankers.
“Clearly, the problem with know-your-customer rules for banks is that if someone applies for credit, like a credit card or personal line of credit, it takes a lot of diligence to make sure we know the identity of the customer, because if the bank is bad, the bank is likely to lose money,” said Steven Gonzalo, president and chief executive officer of American Commercial Bank & Trust, a bank with $1.3 billion in assets in Chicago, Illinois, and a member of the trade group. “From a deposit perspective, some banks do not perform the same level of due diligence because the bank assumes that the risk of loss to them is zero or minimal, and does not consider losses due to fraud incurred by counterparty banks. And therein lies the fault.”
Independent Community Bankers of America said check fraud incidents more than doubled last year, with 501,477 reported incidents in 2022 and 249,812 reported incidents in 2021.
The refusal of many large banks to even respond to so-called fraudulent chargeback claims from small banks prompted the trade group to request joint supervisory guidance. Small banks want more rigorous review and enforcement of compliance with the Bank Secrecy Act and customer identification program rules that require banks to withhold information about customers at the time they open an account. Schroeder said big banks should be criticized for management failures in the CAMELS rating system, in which regulators rate a bank’s strength in six categories, including management ability.
“The fact that the largest banks have not reasonably addressed these redemption requests is a clear indication that they are not managing this process properly – the ‘M’ in CAMELS,” Schroeder said. “The largest banks are enabling a weak link in this criminal chain by allowing fraudulent accounts to be opened in the first place.”
Check fraud has become a huge problem for the United States Postal Service. Robberies and assaults on postal workers have become a near–dailyidea with mail bags and universal mailbox keys routinely stolen for check washing, said Frank Albergo, president of the Postal Police Officers Association. Albergo posts online incidents of check fraud and assaulted postal workers. So far this year, there have been 49 armed robberies of mail carriers reported in the media, Albergo said.
“Each armed robbery of a mail carrier leads to hundreds of check fraud victims,” he said. “Check fraud fueled by mail theft has gotten out of hand.”
While a customer whose check is stolen usually gets a refund from their own bank, that bank fights to get a refund from the so-called first-deposit bank where the check was deposited. For small banks, the problem of check fraud has increased due, in part, to the use of mobile deposit technology that may not be capturing fraud. In addition, some bankers suggest that tellers are not properly trained to detect fraudulently altered checks, even though many of the checks are blatantly fraudulent with names crossed out and other names filled in
“It’s one of the worst types of fraud. It’s attacking two hallowed institutions in the United States: the Postal Service and your bank,” said Jill Sung, chief executive of Abacus Federal Savings Bank, a bank with assets of $316 million in New York. “When you put your mail in the mailbox, you trust that it will go to the person who is supposed to receive it. When you write a check to a vendor, you trust that that check will go to the vendor and the person will get paid. It’s a meltdown.”
Illinois bankers ask for very specific supervisory guidance that requires banks to confirm receipt of a refund request within 15 to 30 days. Banks would have another 90 days to resolve a claim by paying it. Community bankers also want banks to be penalized if disputes are not resolved after 180 days. Schroeder said community banks should also be able to appeal when big banks deny all liability.
The trade group surveyed its members and found that it takes an average of five months for big banks to refund fraudulently altered checks, although the process should take a maximum of 90 days. Some large banks take up to 18 months to repay small banks. Bank losses range from $30,000 to $1 million, he added.
Anne Balcer, Senior Executive Vice President and Head of Government Relations and Public Policy at Independent Community Bankers of America, said: “We are working proactively to identify solutions to increase the efficiency of the return of funds, which will require close coordination between regulators”. , law enforcement and financial institutions to reverse this worrying trend.”
A spokesman for the American Bankers Association, which represents the largest banks, said the rise in check fraud is a serious problem affecting banks of all sizes.
“ABA is working collaboratively with our members and other stakeholders to implement innovative solutions that address the real problem: bad actors taking advantage of customers and the banks that serve them,” the spokesperson said.
