The Nigerian Counterfeit Check Fraud:

Ruining lives by the thousands



The Bank's Role

In order to understand the bank's role in all of this, you must first understand what a bank really is.

In it's very simplest form, a bank is an accountant with a calculator, a ledger, a safe, and a license to take money in for safekeeping.  Everybody's money is kept in the safe, and separated by owner in the ledger, not the safe.  A simple system of debits and credits.  That's it folks.  Everything beyond that consists of add-on services to garner more deposits from customers so that the accountant can pay for the overhead.

The way in which the accountant pays for the overhead is by charging a small fee for maintaining each account (i.e. accounting for the funds in his care), and by judiciously lending out a portion of the gross deposits.  By charging interest on the loans, some of which is shared with the depositors, he can now pay for his office and his salary.

A bank is a building that houses the accounts of its depositors 

None of the money in that building belongs to the bank itself, other than what it earns in fees for service and its portion of interest on loans and investments.

The processes of modern banking are complex, particularly since the advent of electronic banking, the current tremendous growth of international trade and trade banking, and the seemingly endless rules and regulations, but the basics remain the same.

So along comes Joe with a forged check from a Nigerian con artist.  Granted, Joe doesn't know the check is forged, but that's not the real problem.  The problem is where the money comes from that will go into Joe's account for him to spend.  You see, in the case of a forged check, it comes from Joe's neighbors.  It comes out of that "safe" we talked about in the first paragraph.


And this is how it works.  We'll call the place where Joe keeps his checking account "JoesBank."

JoesBank electronically verifies the check that Joe brought in.  In other words, a teller or bank officer looks up the check owner's account on a computer.  Sure enough, there's money in the account on which the check is drawn.  Joe's account is credited with the amount of the check.

There are two processing possibilities for crediting Joe's account: 

  1. If the check is a Cashier's Check or if Joe is a customer in good standing, Joe's account may be immediately credited with funds. 

    "Immediately" means that a portion of the  money in the JoesBank "safe" is credited to Joe's account pending receipt of the funds from the bank that issued the Cashier's Check. 

    Normally, the Cashier's Check bank debits funds from its "safe" and sends them to JoesBank.  JoesBank puts the funds from the Cashier's Check bank back in its "safe." 

    I'm simplifying here, but only by very little.  No point in getting into each detail of how money moves through the Federal Reserve, going back and forth between banks. 

    In any event, in this case the Cashier's Check is denied, so there is no money to put back in the JoesBank "safe" to replace the money credited to Joe's account.

  2. If the check is a regular corporate check, it's sent through the system.  This means that a Hold is placed on the check until it clears.  That means the check is presented to the account holder's bank and, if there are sufficient funds in the account holder's account on the day the check arrives, the amount is credited to JoesBank.

"Clears" is an electronic term.  It means that the amount of the check is electronically conveyed to the account holder's bank as a debit, followed by the physical check which travels in what are called "batches" to a check clearing house. 

Again, I'm simplifying but it's not much more complicated than that.  Basically, Brinks picks up a bag (batch) of checks from JoesBank at the end of the banking day, drives them to the local check clearing house, and from there the checks are sent off to the various banks they came from.

Back to clearing the check.  A check travels through the system electronically and physically.  The check owner's bank electronically acknowledges receipt of the debit, debits the check owner's account, and forwards the funds back through the system to be credited to JoesBank, then to Joe's account. 

Depending on the "route" (how many credit and debit processes the check owner's bank is from JoesBank), the entire process can take from just a few days to a couple of weeks.

Now comes the sticky part

Remember the physical check that Brinks picked up and transported to the clearing house?  It is finally verified by actual eyes and declared invalid.  If it's a Cashier's Check or Money Order, that happens fairly quickly. 

If it's a corporate or personal check, eyes-on can take weeks depending on when statements are sent out and when the account holder actually eyeballs the check.  Or verifies his account balance.

Once the check has been declared invalid (this includes Cashier's Checks, Money Orders, Traveler's Checks, what have you), the check owner's bank sends a debit through the system, debiting JoesBank for the amount in full, plus handling fees.  JoesBank has no choice but to allow the debit to be taken from its "safe."

What's in the "safe" specifically means a portion of the sum total of the money that Joe's neighbors have left with JoesBank for safekeeping, minus that which is out on loan and invested. That's how the ledger is kept.  Depositor money in, depositor money out.  Because of the bank's license, it is the bank's fiduciary responsibility to retrieve those funds by whatever manner possible. 

Since it was Joe's contractual responsibility as an account holder to be responsible for the true value of what he deposits into his account, Joe is the one to whom the bank turns.

Bad checks

Bad checks are a daily cost of doing business for any company.  Happens all the time.  Sometimes the company can recoup on a bounced check, sometimes its charged off to Bad Debt and becomes a Loss on the company's books.  The company is out the amount of the check, plus the bounced check charge, plus the value of the product or service the check was written for.  This may be tough on a company, but the financial consequences are far worse for the individual like Joe.  In fact, the consequences can be overwhelming.

Many banks in the U.S. have yet to adjust their system or their way of thinking to the onslaught of the Nigerian Counterfeit Check Fraud.  Yes, they could work out a loan with the victim for the entire amount of the loss plus expenses; but in many cases the victims are selling items because they are strapped for money to begin with.  Some victims simply cannot afford to pay back a loan, leaving the banks to press on using whatever recourse is available to them.

For more on this issue and to join a discussion board, you might want to click on over to Scam Victims United where victims of this fraud are meeting to tell their stories and work on solutions.

Next: Western Union - Wiring Money Into the Void, and Federal Counterfeit Law  >>