We sometimes get questions from members who deposited
a check that turned out to be fraudulent (such as a counterfeit check used in some
form of overpayment scheme), or was returned for non-criminal reasons
(nonsufficient funds being the most common scenario). The question is: “Why don’t
I get to keep the funds?”
The short answer is: because there were no funds to begin with.
The longer answer has to do with what a check is, and what happens when one is written
A check is essentially a symbol of money. It is not money itself—even in the old days when a
cashier’s check was assumed to be “as good as cash,” a check was still a
(If you really
want to get into it, money is also a symbol, of stored labor or stored value,
but that’s outside the scope of today’s article.)
I’m going to oversimplify and leave out the
details like electronic transfers and intermediaries, but the story is pretty
much as follows. We’ll start with the standard-issue case with no problems:
Person A writes a check to Person B.
At the start, Person A has money in an account at Bank
A. He writes a check to Person B, who takes it to his Credit Union B.
At Credit Union B, the check is taken in, and a
deposit is made to Person B’s account. However, Credit Union B does not make
all of those funds immediately available from that check, because it needs to make
sure the check is good first. A “hold” is placed on some or all of the funds,
depending on if the check is local, non-local, the type of check, etc.
Credit Union B presents the check to Bank A, who
looks at Person A’s account and says, “Yes, these funds are available.” Bank A
gives the money to Credit Union B, who then makes the funds available to Person
B. The money has now successfully moved from Person A to Person B.
Now let’s see what happens if a check is
Person A writes a check to Person B. The check appears to come from an account at Bank
A, but in fact Person A has simply created a fake check on a computer. He has
no account at Bank A whatsoever.
Person B presents this check at Credit Union B.
The check is deposited, and the standard hold is placed on the funds. Credit
Union B presents the check to Bank A, who responds, “No, this account does not
exist, and we have no customer with that name.” The funds are NOT transferred from
Bank A to Credit Union B, and the hold is NOT lifted from Person B’s account.
The deposit is reversed. When Person B calls to ask why it’s taking so long for
the check to clear, he will find out that the check he deposited turned out to
And here’s the real kicker: if Person B took out funds equal to the amount of the check, either because he already had enough money at Credit Union B to cover the amount, or because he bullied a teller into lifting that hold prematurely (it used to happen quite often!), that cash is now lost. If he simply held onto it, no harm done: he can re-deposit the money. If he wired it back to Person A, or spent it himself, it’s gone. If his account has been drawn negative, he now owes money to Credit Union B, because he essentially withdrew funds that did not exist. He doesn’t get to keep it because it was never his to begin with—money cannot be created out of nothing.
From Credit Union B’s perspective, Person B came
in with a check that turned out to be fraudulent. Bank A will never cover that
check, because all Bank A did was exist for Person A to create a fake check
for. Credit Union will not cover it, because from their perspective, here is
what it saw: Person B presented a check that turned out to be fake.
Credit Union B did not see Person A make that fake check, or give it to Person B.
Person B might have made that fake check himself, or even fabricated Person A
from whole cloth. If Credit Union B gave Person B money for a fake check and
then said “oh, just keep it,” nothing would stop Person B or anyone else from simply making fake checks, cashing them, then
claiming to be a fraud victim and keeping the money.
Check holds absolutely exist to protect the
financial institution that places them, sure. But they also absolutely exist to protect consumers from taking out nonexistent
money, and ending up on the hook for thousands of dollars.