Truncation and Providing Copies of Checks
Many banks truncate checks. Some banks go so far as to provide no paper statements and their Internet banking does not provide copies of paid checks unless the depositor asks for them. I have always thought that this exposes banks to extra risks by giving up protections in the Uniform Commercial Code and the account agreement. A recent decision of a New York appellate court suggests that complete truncation, without providing copies of paid checks, is a bad idea.
For seven years, a dishonest bookkeeper had been drawing checks payable to a bank with which her company did business and had a line of credit. The president signed the checks, but after he signed, the bookkeeper diverted the fund by inserting her personal credit card account number on the memo line of the check. Years later, the company discovered the fraud and sued the bank for misapplying the check proceeds. The Bank had provided copies of the paid checks to the company. The court accepted the Bank’s defense, based upon a provision of the UCC, that if the company had diligently looked at the copies, the company would have noticed the incorrect account number in the memo section and thus would have discovered that the checks were being applied to pay the bookkeeper’s own debt.
Today’s Take Away. If you truncate checks, make sure that you affirmatively make copies of the checks available, at least on your Internet banking site, without your depositor them having to ask for them. Also, review your account agreements to verify that you have appropriate language shifting the risk of loss to the customer if it fails to carefully review the copies of the checks that you make available and fail to report apparent fraud.