If a customer reports a fraudulent check after receiving their statement, is it true that we have only 24 hours to return the check after receiving it, regardless of the fraud?

Yes, banks generally must return checks by midnight on the next banking day after receiving the check, as required by the Illinois Uniform Commercial Code (UCC). Although federal Regulation CC permits certain limited extensions of the UCC midnight deadline rule, they almost certainly are unavailable when the fraud is not discovered until after the customer receives their statement.

Outside of the check return process, your bank still may make a claim against a depository bank for a fraudulent check under the UCC presentment warranties. When the depository bank presents a check to your bank, it makes three presentment warranties: (1) there are no unauthorized or missing endorsements on the check, (2) the check has not been altered, and (3) the depository bank did not know that the drawer’s signature was forged. If a presenting bank has violated any of these warranties, it may be liable to your bank.

We also note that your bank should assess whether a Suspicious Activity Report should be filed regarding a fraudulent check (particularly if it is for more than $5,000).

For resources related to our guidance, please see:

UCC, 810 ILCS 5/4-302(a) (“If an item is presented to and received by a payor bank, the bank is accountable for the amount of: (1) a demand item . . . whether properly payable or not, if the bank, . . . does not pay or return the item or send notice of dishonor until after its midnight deadline.”)

UCC, 810 ILCS 5/4-104(a)(10) (“‘Midnight deadline’ with respect to a bank is midnight on its next banking day following the banking day on which it receives the relevant item . . . .”)

Regulation CC, 12 CFR 229.31(g) (“The deadline for return or notice of dishonor or nonpayment under the UCC or Regulation J (12 CFR part 210), or § 229.36(d)(3) and (4) is extended to the time of dispatch of such return or notice if the depositary bank (or the receiving bank, if the depositary bank is unidentifiable) receives the returned check or notice (1) On or before the depositary bank’s (or receiving bank’s) next banking day following the otherwise applicable deadline by the earlier of the close of that banking day or a cutoff hour of 2 p.m. (local time of the depositary bank or receiving bank) or later set by the depositary bank (or receiving bank) under UCC 4-108. . . .”)

UCC, 810 ILCS 5/3-417(a)(1) and 810 ILCS 5/4-208(a)(1) (“Presentment warranties. (a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that: (1) the warrantor is or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft. . . .”)

Uniform Commercial Code, 810 ILCS 5/3-417, cmt. 2 (“Subsection (a) states three warranties. Subsection (a)(1) in effect is a warranty that there are no unauthorized or missing indorsements. ‘Person entitled to enforce’ is defined in Section 3-301. Subsection (a)(2) is a warranty that there is no alteration. Subsection (a)(3) is a warranty of no knowledge that there is a forged drawer's signature.”)

OCC Suspicious Activity Report Rules, 12 CFR 21.11 (“A national bank shall file a SAR with the appropriate federal law enforcement agencies and the Department of the Treasury on the form prescribed by the OCC and in accordance with the form’s instructions. The bank shall send the completed SAR to FinCEN in the following circumstances: . . . (2) Violations aggregating $5,000 or more where a suspect can be identified. . . .”)