Unwary consumers duped by counterfeit check scams

Banks required by law to give depositors quick access to funds, often before a phony check bounces.

If it looks like a check, has watermarks like a check, and cashes like a check ... it still might not be a check.

Just ask Francis George. The retired home remodeler in Darby, Pa., deposited a $4,000 cashier's check he received for a 1993 Ford Thunderbird that he had advertised online for only $1,000. After he was told by his bank that he had access to the money, he wired $2,800 to what he thought was an overseas car shipper, attempting to do a favor for the buyer.

The buyer turned out to be a con man: The check was a fake. Now his bank, Wachovia, is holding Mr. George responsible for the money – money he never would have wired in the first place, he says, if the bank had not told him that he would have access to the funds before it verified that the buyer's check was good.

Check scams like this one are becoming more common, and while some financial institutions are taking a proactive approach to warning their customers of the dangers, others may not tell account holders that after they make a deposit they may have access to funds before the bank can verify the check.

This situation leaves unwary consumers in a jam since depositors, not the bank, are responsible for bad checks and associated fees.

Banks say they are caught in the middle. Federal law requires them to give customers quick – often next-day – access to funds, but it may take several weeks to verify that a check is good. An explanation to customers that they have access to funds before a check clears could be seen as an attempt to skirt the law, says Nessa Feddis, senior federal counsel for the American Bankers Association (ABA).

Consumers, she says, are in the best position to know whether a payment they've received is legitimate, since they know the details of the transaction.

"There are normally red flags," says Ms. Feddis. "The broader message is almost back to [what you were told] in third grade: 'Don't trust strangers.' "

Wachovia bank's fraud detection systems catch more than 90 percent of the 500 or 600 fake checks its account holders deposit each month, says Brian McGinley, Wachovia's director of loss management, preventing potential scam victims from wiring the money away. And, he says, customers are warned about the risks of check scams in the occasional mailing insert or in-bank flyer.

But ask a Wachovia employee, and you may not learn that access to funds doesn't necessarily mean a check is good. A representative answering Wachovia's customer service line and an employee at a Wachovia branch in Manhattan both told this reporter that the bank makes sure checks are good before giving account holders access to the money. At the Manhattan branch, the representative said that up to $100 might be advanced, but otherwise the bank checked to make sure the funds were good before giving customers full access to them.

Wachovia spokespeople say that they can't comment on conversations they weren't party to, but that representatives are trained to give out correct information, and they will follow up with their front-line representatives.

Consumer advocates contend that banks could do more to inform account holders about the risks of check scams. Federal law requires that banks tell consumers their funds are available, says Susan Grant, director of the National Consumers League's (NCL) fraud center, but nothing prevents a bank from telling customers that it may not have verified that the check has been honored.

"It's a preventable crime, if you can catch consumers when they're depositing the money," says Ms. Grant, who has worked with the ABA on consumer awareness drives. "It just requires an explanation."

In the meantime, con artists are increasingly able to prey on consumer ignorance. Fraudulent-check schemes are the most common telemarketing scam and the third most common Internet scam, according to the NCL. And they're growing – in the first three months of 2007, check scams accounted for almost half of the NCL's telemarketing complaints, up from less than a third in 2006; and accounted for 15 percent of the Internet scams, up from 11 percent in 2006.

Check scams aren't the only consumer trap out there, but they are among the most costly to their victims. The NCL receives more complaints about fraudulent Internet auctions and general sales – where consumers pay for an item they never receive – than they do for Internet-based check scams, but the average consumer loss is in the $1,000 range. Consumers typically lose $3,000 to $4,000 when they fall victim to a check scam.

Other bank-related scams

Check cons aren't the only prevalent banking-related scam. Consumers may be the victim of identity theft after they're tricked into giving out personal information in response to e-mails which purport to be from a trustworthy source – a con known as "phishing." "Phishers" impersonated financial service companies in more than 40 percent of their attacks in the first quarter of 2007, capitalizing on customer confusion during mergers and security systems upgrades, according to the Brandjacking Index released by MarkMonitor, an Internet security company in San Francisco.

But check scams remain a top concern for consumers, in part because of con artists ability to adapt. Victims may be told they've won a lottery, or contacted after they've advertised a room to rent or the sale of an expensive consumer good.

Work-at-home schemes are also common traps, says the NCL's Grant. Consumers may be told they've been hired as a mystery shopper or an account manager, and asked to wire part of the funds of a check they've received back to the company, she says.

The payment may appear to be a cashier's check, postal money order, or traveler's check. The only common link is that consumers are asked to send some part of the money they receive to the person ostensibly paying them.

"There's no legitimate reason why anyone would ask you to do that," says Grant.

Some banks are taking a proactive educational approach to protecting its consumers from check scams.

At customer awareness fairs around the country, Fifth Third Bank educates its customers about different types of check fraud. Account holders play a spot-the-fake-check game, where they try to differentiate between a good and bad check – a feat that's next to impossible. When customers ask about fund availability, tellers at Fifth Third emphasize that the funds may be available before the check has cleared, says Diane Ness, Fifth Third's fraud education manager. Tellers may even take the initiative to ask consumers questions about a check if it appears suspicious.

"First and foremost we want to protect our customers," says Ms. Ness. "The best protection that we have is getting out the information."

Efforts to educate account holders at Illinois' West Suburban Bank about the risk of check scams have saved customers tens of thousands of dollars, says Craig Kelbus, West Suburban Bank's vice president of loss prevention. When an account holder deposits a check worth more than $1,000, tellers hand them a flier which warns them about check scams.

"The fact you can withdraw cash from your account shortly after depositing a check does not necessarily mean the check you deposited is good," the pamphlet says. "Counterfeit and bogus checks can sometimes take weeks to be discovered and returned to your bank unpaid."

Informing account holders of the risks of check scams has reduced customer losses due to check scams by 80 percent, says Mr. Kelbus.

A long road to recovery

A simple notification might have saved consumers like George, the retired home remodeler, from financial difficulties. George, who lives on Social Security, says that the bank took all of the money in his account – including a month's Social Security – to help cover the bad check.

Unable to open a new checking account at another financial institution, he has relied on check-cashing services to cash his Social Security payments, hiding the money in his house. Not having a bank account hasn't been easy for him – he once spent several days searching for money he misplaced, and he is still fighting to regain his financial footing.