The Liability Shift Created by the UCC
The Uniform Commercial Code (UCC) that governs financial transactions in all 50 states was modified in the mid-1990s, shifting some liability for check fraud from the banking industry to depositors through the concepts of "ordinary care" and "comparative negligence."
- Banks and their clients are required to use "ordinary care" to prevent check fraud. This would involve implementing "reasonable commercial standards" that prevail in the area in which the person is located and the industry in which the person is engaged. The code does not require financial institutions to examine each check. Prevailing standards for "ordinary care" include bank clients using positive pay, for example, to prevent fraud, if such a service is offered by their bank.
- The section addressing "comparative negligence" indicates that the fraud risk remains with the company, if the bank exercised "ordinary care" in processing the check.
- The UCC also addresses "reasonable promptness" and indicates that there is a period of time in which the customer is required to notify their bank of unauthorized signatures and/or alterations of their checks. 48 30 days is currently the maximum time limit.
We have had a long time to implement effective measures to prevent various forms of paper check fraud. However, it is believed that Check 21 will most likely lead to a rise in check fraud, and, in addition, check imaging or electronification opens a new frontier for fraudsters who will now try to access and alter digitized information.
