Stale-dated check fraud: how much has your city lost?

FBI Law Enforcement Bulletin,The, July, 2006 by Robert D. Sheehy

A recent investigation uncovered a novel avenue of fraud whereby criminals recruit municipalities as unwitting coconspirators to their own loss. Initially brought to the attention of the U.S. Attorney's Office for the District of Maryland by a local municipality, the investigation, conducted jointly with the FBI, concerned a vendor who contacted the city's department of finance to request the reissuance of a check. The retailer explained that the original check, received 1 year earlier, had been misfiled and only discovered during a routine review. Because the date was well beyond the 180-day life allowed by the municipality, as indicated on the check, the merchant sought a replacement. Upon reviewing its records, the city discovered that a third party claiming to represent the vendor already had requested and been issued a replacement check. The third party, in fact, had provided a signed limited power of attorney showing that the retailer had entered into an agreement with this company to collect the payment. Because of the significant monetary amount, the municipality began an audit to determine what had occurred. It quickly discovered that this third party, located out of state, had paid a nominal charge and received a stale-dated check listing. (1) The city's initial review disclosed four other requests made by and checks issued to this same firm for stale-dated check replacements.

[ILLUSTRATION OMITTED]

The investigation subsequently identified a total of nine replacement checks, totaling in excess of $157,000, as having been requested and received by this third party from the complainant municipality during a 9-month period. It also determined that this firm received numerous checks from multiple jurisdictions under similar circumstances. Further analysis of those records identified additional companies acting in concert with the original subject business or having the same ownership ancestry. A review of disbursements made from various bank accounts operated by these companies disclosed that no payments were made to any of the original vendors that the third parties claimed to represent.

[ILLUSTRATION OMITTED]

In total, the main subject of this investigation received more than $.5 million in municipal government payments through fraudulent requests and representations. However, and more important, this investigation illuminated a heretofore underestimated vehicle for committing fraud.

DEFINING THE TERM

Typically, a government check carries a life limitation printed on the front warning that it will become void after a specified number of days. Banks should not honor or negotiate a check beyond the indicated period.

The issuing municipality has a department or bureau that accounts for issued checks. A subset to this accounting involves the maintenance of a stale-dated check registry of those checks not negotiated within their allowable life limitation. The issuance of a check in payment for provided goods or services does not eliminate a city's liability. Jurisdictions recognize this and will reissue a payment upon the request of a vendor after determining that the original check has not been negotiated and is included on the stale-dated check list. Many also honor requests for repayment to third-party collection agents acting on a vendor's behalf.

The investigation presented at the beginning of this article determined that many municipalities broadly interpret public information or open-government requests to include providing stale-dated check data. For a nominal fee, $25 to $60 encountered during this case, the city will provide detailed information or the entire stale-dated check list to any requester. Numerous jurisdictions even post their entire stale-dated check list on their municipal or department Web site. Usually, the provided information includes exactly what the municipality requires for reissued payments.

UNDERSTANDING THE PROBLEM

Although a number of lawful individuals and firms locate a vendor included on a stale-dated registry, negotiate a recovery fee with them, and make a collection on their behalf, less scrupulous people have found this situation ripe for fraud. After all, the stale-dated check list contains all of the required data needed to request a replacement check. Therefore, it should come as no surprise that some have decided to forego locating and negotiating with the original vendor. Rather, they simply request a reissued payment check and provide a forged power of attorney form, which should satisfy most questions that might arise.

To date, victimized municipalities represent both city and county jurisdictions in states located on both coasts, as well as in the central plains. Because of its simplicity, this fraud could easily migrate to state and federal government entities.

Research has disclosed that every jurisdiction in the United States, regardless of size, has amassed countless stale-dated checks amounting, conservatively, to hundreds of millions of dollars. These checks are an accrued liability for a municipality until paid to the rightful vendor or until applicable law allows the jurisdiction to claim the funds through escheatage.