discussion about the loophole used by check scammers

On Techdirt.com, the question was raised: "Shouldn't we fix the check clearing loophole that so many scammers abuse?"

http://www.techdirt.com/articles/201012 ... buse.shtml

The text is pasted below, follow the link to techdirt.com to read the comments (over 100 comments in response).

Shouldn't We Fix The Check Clearing Loophole That So Many Scammers Abuse?
from the simple-questions dept

Slashdot points us to a recent story about a guy who lost his lawsuit against a bank, over a variation on a classic Nigerian email scam. The scam is one we've discussed many times in the past: somehow the victim gets a big check, which they're expected to deposit in a bank. After the check "clears," the victim/recipient is supposed to transfer a large chunk of that money to the scammer, on the belief that they get to keep whatever is left over. What really happens is a few days after the check "clears," the bank finds out it's fraudulent, and tries to void the transaction. But, by then, the victim has already transferred out a big chunk of money (and the scammer has already taken all that cash out of the bank and disappeared) -- leaving the victim footing the bill, with the bank expecting them to come up with the missing cash. In this case, the scam took on all the familiar facets of this scam:

In March 2009, Brian Peters received an email from someone purporting to be a citizen of Malaysia. The e-mail informed Peters that certain third parties in the United States and Canada owed the purported Malaysian money, but that "they can not transfer the funds to any bank account outside America continent due to their new company policy [sic]." He asked Peters to "assist me in receiving the funds and forward to me." He offered to pay Peters 12 percent of the money. Peters agreed after apparently negotiating an increase of his fee to 15 percent.

Peters deposited the $808,988.90 in checks received from the purported Malaysian at Chino Commercial Bank. After the bank notified Peters that the checks had cleared, Peters wire transferred $468,000 to Hong Kong. Shortly thereafter, the checks were dishonored after the bank detected that they had been altered. Since Peters was personally liable for any overdrafts on the account, which had only a few thousand dollars, the bank sought to attach property owned by Peters to collect on the overdraft. The trial court granted the bank’s motion to attach against Peters in the amount of $458,782.60.

This certainly isn't the first such lawsuit. We wrote about a similar case two years ago, which involved some scammers tricking a law firm (who really should have known better). The reason this scam works over and over and over again is pretty simple: most people have no idea that when a check "clears," it's not actually been validated. This is apparently due to various laws that require banks to make money from checks available within a very short period of time. So the way banks deal with this is to just make the money available, and if they later find out that the check was fraudulent, they pull back the money. But, of course, most people don't know this and assume (somewhat reasonably) that if a check "clears" and the money is listed as "available," the bank has made sure the check is legitimate. This is a somewhat unintended consequence of laws to make paying by check work better, but it leads to a huge opening for these types of scams.

So if they need to do that, shouldn't it make sense for banks to at least put forth pretty clear warnings on money that has not really been validated yet? Or to at least proactively warn anyone seeking to withdraw money that hasn't really been validated that if the check fails to validate, they may be liable? It seems like there must be better ways to deal with this kind of scam than to just let the scammers keep taking advantage of this knowledge gap.

I know that we have at least two ex-bank personnel on the forum and it just isn't that simple a topic, and though banks aren't popular, this is a situation where they can't win.

The LAW is that a bank has no right to charge a bank account with a forged instrument, no matter how perfect the forgery may be, and no system exists for a customer to notify their bank that every cheque presented on their account is 'bona fide' and such a system would be unworkable anyway. So, in reality the bank is only certain of clearance technically after the passage of time relevant to the country's Statute of Limitations. Any time up to then a customer could refute the cheque as a forgery.

The scammers exploit the confusion caused because it is a requirement in many countries that the money is made available to the customer after a set passage of time, usually a few days. Obviously a bank cannot allow the Stute of Limitations to elapse before paying out so it is easy to make the mistake that because the money is there, it can't be bounced. How wrong that is.

I frequently criticise banks but people must understand that they should never ever pass/cash cheques for strangers through their account for the one simple reason that when you ask your bank if a cheque has cleared, the correct response they should give is that they never know. If you try to use that against them, they'll respond saying you didn't inform them that you were referring to a counterfeit cheque. In other words, you didn't ask the right question.

Where I bank (not in US), the bank will put the amount of the Check on my account, but it'll be "closed" for about a month. So I can see it on the balance, but cannot use it.

That's for checks below about $1500. For larger amounts, they won't even put it on my account until they collect it from the bank that issued the check (which again is seldom less then 30 days).

I find that in the Credit Card Era, this paper check business, which is still so popular in other parts of the world, doesn't make much sense.

But I realize, that changing a system that's been in place for this long is much slower than omitting a system and jumping right to the next one (as my country did).

And I suppose stolen CCs also have their risks, but I suppose those are reported faster. Especially when someone is receiving text messages to their cell phone about every spending from their card as I do.

And of course, I'm not really thinking off-line here, so most of those who don't transact over the internet and maybe don't even have a mobile phone to receive text messages to (or cannot use it) would be in serious trouble.

Thank god I had a very good mentor when I saw the first randomly faxed Nigerian letter in my life, and learned the easy way what these were.

So I think informing others works best. But again, you can only inform those, who look for it. And those have usually alread lost some money (or in the better case they were close to it).

So keep on, they might change the US - UK laws for you if you are persistent enough.

The fact is that there isn't a perfect solution to this problem, and that any system, or any change to an existing system will be exploited by a scammer.

Lets' say that the system is changed so that any person can rely on a cheque being cleared five days after deposit, for instance. All this does is to make the loser the person whose account the the counterfeit cheque is drawn on. The scammer remains the winner, but the person who passed the counterfeit paper has still committed a crime, and as the innocent victim is the loser, he/she will be certain to press for that person to face arrest and trial. The situation becomes worse than before. Passing counterfeit paper is a crime and a person may try to pass on the financial loss to someone else, but it makes their legal situation ten times worse, especially as it cannot be denied that it's been done for financial gain. The fact that they may have done it unwittingly may reduce their sentence, but once a conviction is secured, undoubtedly the other victim will take steps to recoup their money, once it's been established that they have lost money due to a fraud. Worse still, as a counterfeit signature has no validity in law, it will likely be a banking corporation coming at you, as they cannot take money off an account against a forged signature. Going to trial as a convicted fraudtser up against a bank corporation would be hopeless.

Trying to establish a legal principle that if you bank counterfeit cheques and the bank doesn't notice, they must stand the loss, sounds nice, but it's never going to happen and it's fundamentally inequitable.

There are some nifty tricks that are used by scammers to make their cheque scams work better, but don't seem to be used by 419 scammers, as far as I'm aware and I won't detail them here. To think that using cards will solve the problem is just dumb to believe. Chip and pin was meant to be the solution to card fraud until it was discovered that the information was being sold in the countries where the work had been outsourced. Even the extreme solution used by the ancient Egyptians to hide the secrets of their pyramids by killing the architect didn't work, and there's no such thing as a perfectly secure payment system.

In fact, in many ways, the more secure a system is, the better are the rewards of cracking it, and it doesn't require major sophistication to do it. We've seen examples of techniques used by scammers to get hold of card details here on the forum and I'm unimpressed by the attitudes of banks who refuse to accept that their systems and procedures may be flawed, but I won't go there.

To sum up - the system as it stands won't change. and anyone passing counterfeit cheques can consider themselves lucky if they don't face criminal charges on top of their financial loss. Trying to argue the case will only ensure that they get prosecuted. Using a card to make payment may not have the same flaws, but scammers are already very active in that area and the pitfalls to using a card unwisely can be even more expensive.

The victim of a cheque scammer feels hard done by unsurprisingly, and many victims are intelligent, but in believing that someone else should take the loss, they don't see the whole picture.

The solution is to educate and publicise - which is what we do, as well as helping people to cope with the aftermath of being scammed, but seeking a change to the law is unlikely to happen, and certainly won't stop the scammers in any case.

There are some nifty tricks that are used by scammers to make their cheque scams work better, but don't seem to be used by 419 scammers, as far as I'm aware

I meant that when I saw a 419 letter first and was told what it was, I automatically assumed that check scams - or I should say "I pay you 100% and you pay X 90% and keep 10%" seeming easy money just the same - were not legit.

Though I'm quite lucky here, as we don't really have paper checks at all. But of course, CC fraud or even scams using fraudulent bank accounts may exist here too. But it might drive away some scammers who prefer paper checks.

A big "advantage" - and a big "disadvantage" at the same time here is that people in my nation don't speak much English (generally), so they just delete any e-mail that comes to them in English.

Of course at the same time they also lose all opportunities to sell products/provide services to the English speaking community - which is not so good for them.

So yes, I agree, that all we can do (and are doing here) is educating others.
And you're doing a very good job at that

I recall an instance where an American college professor ended up going to prison over a cheque scam, undoubtedly because he couldn't understand or accept that he had been duped. It is surprising that someone who probably doesn't even have a bank account or a very good idea of how one works can trick a college professor, but the scammer only needs to know one trick, and being clever doesn't stop you getting scammed if you trust someone.

Scammers rely on natural human trigger responses. Don't believe me ? People handing out leaflets push them at you to make you take it, even letting go of it as they know it's instinctive for you to want to grab it. It's hard, but more fun, to let it fall on the floor, which is their litter and your tiny triumph and good mental exercise.