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Home >> Checks/Money Orders >> Checks You Wrote
A Case of Embezzlement
Our small town was embezzled by a city employee. Office did not have adequate controls and separation of duties. She wrote checks, forged city manager's signature on some, some did not get the second signature that was required, took checks to her account at another bank. She also balanced the statements and produced reports for mayor and city council. The town's bank did not catch any of the signature forgeries or missing signatures. This went on for several months until the accounts were all overdrawn. Does the bank have any liability?
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 Cases like this involve several rules designed to allocate the cost of the forgeries fairly between the bank that paid the checks and the business (or municipality) that contributed to the losses because of its lax or non-existent controls. The depositor (town) had a responsibility to promptly review its bank account statements. That review was compromised by the fact that the crooked employee was reviewing her own illicit transactions. As a starting point, any transactions occurring more than 30 days after the town's first statement was made available showing one of the fraudulent transactions would be the town's responsibility.
The town, however, could attempt to push some of that liability back on the bank by proving that the bank failed to exercise ordinary care in paying the unauthorized items, thereby substantially contributing to the loss. If the town could prove that, the overall loss would be allocated by a court (if the case ended up there), based on the percentage of blame for the loss. Sorting out the blame can be very time-consuming, and can involve a review of signatures, check review processes, the depositor's controls, etc.
Banks often negotiate with customers in cases like this, in order to arrive at a loss-sharing agreement without resorting to expensive court battles, which can involve negative public relations, too. In fact, some banks include mandatory arbitration of such cases as part of their deposit contracts.
Published on BankingQuestions.com 8/07/08
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