Industry Action to Address Demand Draft Fraud
As reported in the Direct Member conference call reviewing significant issues and outcomes from the NACHA Board meeting of March 2008, law enforcement and consumer protection agencies report that certain fraudulent origination activity is migrating to demand drafts (remotely created checks) as more aggressive risk management and anti-fraud programs are implemented on the electronic payment networks. Because of the technological and organizational limitations of the check clearing system, the industry lacks the ability to adequately track the magnitude and investigate the sources of unauthorized demand drafts.
Regulation CC provides for a warranty by a financial institution that transfers or presents a remotely created check that the item is authorized. Because the Federal Reserve did not extend the midnight return deadline for demand drafts, however, it requires that the institution “must assert claims arising under the transfer and presentment warranties for remotely created checks outside the check collection process.”
NACHA Rule Making Process
The Category B Rules Work Group – Warranty Claims for Demand Drafts through the ACH Network was established to investigate the feasibility and value of allowing paying banks the option to use the ACH Network to make and obtain payment for claims based on this warranty through the ACH Network. If adopted, the approach would provide a means to quantify the problem and identify sources of disproportionately high numbers of demand drafts, similar to how NACHA monitors and tracks returns of ACH payments. The RWG anticipates the release of a RFC for industry feedback in 4th Quarter 2008.
Federal Reserve & Operating Circular 3
Growing concern with the problem is evidenced by a June 16, 2008 letter from the Federal Reserve System’s Retail Payments Office to depository institutions’ CEOs focusing on check images cleared for Internet payment instructions. The letter cautions of the liabilities institutions assume and the warranties they provide when originating such items, namely that all parties in the collection chain warrant that a Check 21 transaction is an accurate image of an original paper check item.
As the Federal Reserve Banks cannot provide this warranty when an item begins with an Internet instruction, it is amending Operating Circular 3 effective July 15, 2008 to reflect that an institution sending an electronic item to the Federal Reserve Banks will be in breach of express warranty if the transaction did not begin with a paper check.
Additional Information
Please cotnact the EastPay office with any questions. 800-681-4224