We believe that you may set off the customer’s deposit account in the amount of the credit that you provided to the customer under Regulation E. While Regulation Z places some limits on the right of offset for credit cards, those limitations do not apply to debit cards that lack any credit or overdraft features.

Under Illinois law, the right of setoff can arise contractually (when the deposit account agreement provides for a right of set-off) or under the common law when there is “mutuality” of parties (the deposit account is owned by the same party that owes the debt to the bank). We recommend checking your deposit account agreement to see if you are authorized to set off the account when fraudulent activity is suspected. (We know of at least one Illinois court decision upholding a bank’s contractual setoff rights for unauthorized withdrawals made by an accountholder from a separately owned account at the same bank.) Even if your deposit account agreement is silent on this issue, however, we believe you can exercise your common law right of setoff if the customer is the sole owner on the account and you suspect fraudulent activity.

Also, you may need to file a SAR if the fraudulent report to the police involved $5,000 or more in debit card transactions.

For resources related to our guidance, please see below:

• Pope v. First of Am., N.A., 699 N.E.2d 178, 180 (3rd Dist. 1998) (court held that bank could exercise its contractual right of setoff for customer’s unauthorized withdrawals from another customer’s bank account)

• Selby v. DuQuoin State Bank, 223 Ill.App.3d 105, 107 (5th Dist. 1991) (common law right of setoff requires a mutuality of parties, meaning that the deposit account is owned by the same party that owes the debt, as well as a matured debt)

• 31 CFR 1020.320 (suspicious activity report requirements for banks)