Tuesday, July 23, 2019

Double Endorsed Checks: What is the Risk?

Posted by Sharon July 3, 2013 2:38pm

Photo Credit: muresan113

There are risks involved in the deposit of a double (or triple) endorsed check.  The biggest risk being forgery.  Even if the Bank knows and trusts the endorsement of the bank's depositor (the second endorser), generally they cannot verify the authenticity of the first endorsement. If the first endorsement is a forgery, or unauthorized, the depositary bank will be liable on their warranty that each of the prior endorsements was genuine and authorized, and that warranty extends for between one year and three years under the Uniform Commercial Code.

When a Treasury check is involved, a reclamation claim can be made by the government up to 18 months after the check is first deposited, which shortens the window of exposure in most states.

Some Banks changed their policies regarding double-endorsed checks after the terrorist attacks of September 11, 2001.  Due to concerns that terrorists could try to obtain money through fraudulent means that involve third-party and double-endorsed checks, some financial institutions have made it much more difficult to cash a double-endorsed check.

Under the Uniform Commercial Code, a check can be transferred between holders indefinitely. This situation does not come up very often, which makes a bank look carefully at the check and the person presenting the check. If the Bank has been given a check written out to a person and the person has both endorsed the check and written the words "pay to the order of ___," the Bank has the same legal rights as the first person who received the check.

Some law enforcement organizations discourage banks from accepting double-endorsed checks. 

If a Bank accepts a double endorsed check, how do they know the authenticity of the first endorsement? That’s the endorsement they are liable for.  How do they know it’s a true endorsement? If you are the Bank of first deposit, you guarantee the endorsements of all parties.  Unless they are all in front of you with identification, how do you know who really signed the check?  And as per state statute, the original payee has several months to contest it.

The drawee bank is relying on the presentment warranty of the bank of first deposit. In the event the drawee bank is notified by its customer of an endorsement forgery, the drawee bank has the right to make a without entry claim against the Bank of first deposit for breach of its presentment warranty.

The Uniform Commercial Code does not require that the Bank of first deposit obtain an endorsement.   Even when a check is presented that doesn’t contain an endorsement, the bank of first deposit makes a presentment warranty that the funds were given to the payee of the check.

The depositor of the check is also liable for the amount of the check under these circumstances, based on the bank's right of chargeback.  The individual making the deposit also provides the same warranty to the depositary bank, so that bank will have a warranty claim against him/her in addition to its routine contractual right to collect for the bad check under the deposit agreement. That said, the bank might have to take legal action to collect, since it's unlikely the funds will be there to grab. That legal action may or may not make the bank whole.

All this being said, each financial institution needs to weigh out their risks in accepting double or even triple endorsed checks.  For those institutions in high risk areas for money laundering, I would take the time to discuss the risk with management and include in your risk assessment.


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Sharon Geiger

Senior Quality Control and Review Specialist

Sharon Geiger has 27 years banking experience, 21 of which have been involved in internal audit. She has extensive knowledge of all aspects of the banking industry, with a particular emphasis on regulatory compliance and identifying risks and controls. As QCR Specialist, she performs Quality Control Reviews to ensure all workpapers and reports are completed in compliance with the firm's standards.

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