Stolen and Forged Third Party Checks
June 19, 2001
In the last week, NASD Regulation has been informed that a number of member firms throughout the country have experienced losses when they accepted third party checks that were lost or stolen. In essence, those perpetrating this scheme use new brokerage firm accounts to cash their stolen and forged checks, leaving the firm with the loss.
- How the Scheme Works
In the examples reported to us, a new customer uses a third party check when opening an individual or corporate account, usually with an out-of-state address, and frequently with an inexperienced registered representative. Especially with new corporate accounts, the representative is told that the customer is relocating and does not have a local bank account yet. A few days or weeks after opening the account, the customer asks that some or all of the funds be wire transferred out of the firm. After wiring the money to an account outside the firm, the firm learns that the check was stolen and the endorsement forged. The firm’s bank charges the firm for the loss.
- Why the Scheme Works
The scam can be difficult to detect and prevent because the third party checks are often stolen from a lockbox that the payee on the check maintains to receive those checks. The payee on the check generally does not realize that the check is missing until after it has reconciled its receivables. By then, those perpetrating the scheme have been able to complete the forgery and disappear before the loss is even suspected.
- Protecting Your Firm
The FBI and the Postal Service are investigating a number of cases with the scenario described above, but cannot investigate all instances reported to them and thus are usually forced to focus their investigative resources only on larger frauds. Firms can best protect themselves from similar losses by ensuring that they have strong controls and their procedures on receiving third party checks and granting requests for wire transfers from new customers. Those procedures should include sufficiently senior review of the transactions to ensure that any third party checks are good and the person or business opening the account is legitimate.