“You Asked Us” is a regular feature of Contact Magazine, featuring questions frequently directed to MCUL Regulatory Affairs by member credit unions. Questions are chosen for publication on the basis of timeliness and those most frequently asked, with answers provided by MCUL staff. If you have a specific question you’d like to see addressed in a future “You Asked Us,” send it along with your name and the name of your credit union to MCUL Regulatory Issues, “You Asked Us,” P.O. Box 8054, Plymouth, MI 48170-8054. Questions can also be e-mailed to email@example.com or faxed to (734) 420-1540. Names and credit unions will remain confidential; this information is needed in case the question requires further clarification.
Given the series of recent fraudulent activities perpetrated by checks drawn on foreign banks that represent preventable risk to credit unions, we thought we would review some of the options credit unions have to provide high levels of service to individual members, while at the same time protecting the interests of the rest the membership.
Q .What constitutes fraud?
A. Fraud is an unlawful attempt employing deceit, trickery or perversion of the truth to wrongly acquire and/or use items of value, including information, identity, property or other rights of another. Thus, fraud can occur in how these things are obtained and in how they are used. Traditional examples in the financial services industry include the use of counterfeit checks or money to purchase goods or services, fraudulent insurance claims to secure payment, fraudulent credit applications to obtain a loan and misrepresentation of a company’s financial status to lure investors.
Q. What is one of the newest fraud schemes?
A. One of the current frauds is a variation of the “foreign lotto,” “inheritance” or “money traffic” scam. Upon receipt of a check drawn on a foreign bank in U.S. funds, the “winner” is required to pay certain fees on the winnings/inheritance in order to obtain the funds. The fraud perpetrator then sends a check to the member drawn on a foreign bank payable in U.S. funds. The perpetrators of the fraud recognize that the credit union will likely put their normal hold on the check and, after the holding period, make the funds available to the member. The member, believing the check is legitimate, wires funds to the scam artist fulfilling their part of the agreement. The so-called “inheritance” or “lotto” check is returned by the foreign bank as counterfeit, causing the member and possibly the credit union a loss. The return of the check may not occur for an extended period of time.
Q. What are some of the options credit unions have when presented with checks drawn from foreign banks?
A. There are a number of options a credit union has to protect itself from possible loss. The first is to simply refuse to accept the check for deposit. Unless the check is a draft written on your financial institution, Regulation CC (12 CFR 229.19(c)(2)) specifically leaves the decision to accept or reject a check for deposit to the credit union.
Option two would be to accept the check, but place an extended hold. Regulation CC does NOT apply to checks drawn on a foreign bank unless the bank has an agency or branch located within the U.S., according to Section 211.21(b) of the International Banking Operations Act. Most of these fraudulent checks drawn on foreign financial institutions will not be subject to Regulation CC and therefore not subject to the normal time restrictions on the length of holds. If you choose to place an extended hold on the check, you should inform the member of your actions prior to placing the hold. Note, however, that although Regulation CC does not apply to certain foreign checks, your funds availability policy and/or other member agreements may govern the length of the hold.
Option three is to choose to accept the item for collection, instead of deposit. When an item is “sent for collection,” it is handled outside of the normal federal reserve process. The check is instead mailed to the bank of account for special processing. It is not accepted for deposit and the member’s account is not credited until the funds are collected.
Q. What precautions should be taken when sending items for collection?
A. Credit unions that may not be familiar with sending checks for collection should first obtain competent advice from their check processor as to the best ways to handle items outside of the normal check collection process.
Q. What can credit unions do to protect members from fraud schemes?
A. Credit unions should advise their members about the fraudulent foreign e-mails and discourage them from replying to any such messages. Many of the links in these messages contain spyware and/or viruses that can be installed onto computers without the user knowing. These programs can later record information, or redirect users to bogus “copycat” Web sites. They should also advise their members to either delete the e-mail or, in the event they are defrauded, file a complaint with the IFCC at http://www.ifccfbi.gov/index.asp.