We have a potential business customer that would like to set up a deposit account and line of credit. The company sells point of sale (POS) solutions for businesses, by providing equipment for processing POS transactions (they use a third-party vendor to process the transactions). They employ several salespeople in many different states to sell this equipment, and they want to deposit checks by having salespeople take pictures of their checks on their phones and send them to the business owner, who would use our consumer mobile remote deposit capture (RDC) system to deposit the checks, rather than our business RDC system. What are the risks of allowing a customer to use RDC to deposit copies of checks? Does the restrictive endorsement “for mobile banking deposit only” provide sufficient protections?

Based on the information provided, it is likely that this customer’s deposit methods will increase the risk of fraud. However, it may be possible to reduce the risk of fraud by requiring the customer’s salespeople to apply a restrictive endorsement on the checks before forwarding photos of the checks to the customer’s owner for deposit.

When your bank takes mobile banking deposits from this customer, the primary risk is that the customer’s salespeople will double-deposit the checks — depositing them once by sending an image of the check to the customer’s owner, and then depositing or attempting to deposit them a second time by depositing the original check. Under recent amendments to Regulation CC, your bank must indemnify any other depository bank that accepts an original check after the check has been deposited by RDC. It appears that this customer presents a heightened risk of such double-deposits, since it is possible for the salespeople to retain copies of the original checks, as they do not forward them to the business owner before or after forwarding images of the checks to the owner.

However, your bank would not be liable to depository banks if the original checks include a restrictive endorsement such as “for mobile deposit at [your bank name] only.” If your bank requires the customer to include this endorsement on all deposited checks, that may mitigate your bank’s liability for double-deposits (though the salespeople may be able to easily evade this requirement, for example by writing the restrictive endorsement on transparent tape, which can be peeled off the original check before depositing it a second time). As an additional safeguard, your bank might also require the check number to be included in the restrictive endorsement, to prevent salespeople from using the same image of the back of the check for multiple checks.

Despite your customer’s request to use the consumer RDC system, we recommend that your bank require the customer to use whichever RDC system is best suited to monitoring for restrictive endorsements and rejecting deposits that lack the required endorsement (assuming your account agreement permits you to reject otherwise properly payable checks for lack of a required endorsement). Also, your bank may allocate losses for double-deposits to your customers’ accounts in your deposit account agreement, as permitted by Regulation CC.

For resources related to our guidance, please see:

Regulation CC, 12 CFR 229.34(f)(2) (“A bank described in paragraph (f)(1) of this section shall indemnify, as set forth in §229.34(i), a depositary bank that accepts the original check for deposit for losses incurred by that depositary bank if the loss is due to the check having already been paid.”)

Regulation CC, 12 CFR 229.34(f)(1) (“The indemnity described in paragraph (f)(2) of this section is provided by a depositary bank that
- (i) Is a truncating bank under §229.2(eee)(2) because it accepts deposit of an electronic image or other electronic information related to an original check;
- (ii) Does not receive the original check;
- (iii) Receives settlement or other consideration for an electronic check or substitute check related to the original check; and
- (iv) Does not receive a return of the check unpaid.”)

Regulation CC, 12 CFR 229.34(f)(3) (“A depositary bank may not make an indemnity claim under paragraph (f)(2) of this section if the original check it accepted for deposit bore a restrictive indorsement inconsistent with the means of deposit.”)

Regulation CC, Official Interpretations, Paragraph 34(f), Comment 1 (“Because the depositary bank’s customer retains the original check, that customer might, intentionally or mistakenly, deposit the original check in another depositary bank. The depositary bank that accepts the original check, in turn, may make funds available to the customer before it learns that the check is being returned unpaid and, in some cases, may be unable to recover the funds from its customer. Section 229.34(f) provides the depositary bank that accepts the original check for deposit with a claim against the depositary bank that did not receive the original check because it permitted its customer to truncate it, received settlement or other consideration for the check, and did not receive a return of the check unpaid. This claim exists only if the check is returned to the depositary bank that accepted the original check due to the fact that the check had already been paid.”)

Regulation CC, Official Interpretations, Paragraph 34(f), Comment 2(b) (“Depositary Bank A offers its customers a remote deposit capture service that permits customers to take pictures of the front and back of their checks and send the image to the bank for deposit. Depositary Bank A accepts an image of the check from its customer and sends an electronic check for collection to Paying Bank. Paying Bank, in turn, pays the check. Depositary Bank A receives settlement for the check. The same customer who sent Depositary Bank A the electronic image of the check then deposits the original check in Depositary Bank B. . . . (b) . . . the original check deposited in Depositary Bank B bears a restrictive indorsement ‘for mobile deposit at Depositary Bank A only’ and the customer’s account number at Depositary Bank A. Depositary Bank B may not make an indemnity claim against Depositary Bank A because Depositary Bank B accepted the original check bearing a restrictive indorsement inconsistent with the means of deposit.”)

Regulation CC, 12 CFR 229.2(bbb)(2) (“A sufficient copy is a copy of an original check that accurately represents all of the information on the front and back of the original check as of the time the original check was truncated or is otherwise sufficient to determine whether or not a claim is valid.”)

Regulation CC, Official Interpretations, Paragraph 34(f), Comment 3 (“A depositary bank may, by agreement, allocate liability for loss incurred from subsequent deposit of the original check to its customer that sent the electronic check related to the original check to the depositary bank.”)

Illinois UCC, 810 ILCS 5/4-401(a) (“A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.”)