IBA Compliance Connection

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We learned that a customer fraudulently obtained an economic injury disaster grant from the SBA, despite not owning a business. The customer used the funds to purchase a cashier’s check that was mailed to a recipient who cashed it at an out-of-state bank. We learned of the fraud approximately one week after issuing the cashier’s check and put a stop payment on it. When the check came into our bank, we returned it due to the stop payment. However, the depository bank claims that it called our bank to verify the authenticity of the cashier’s check and was advised that it is valid. Are we liable for the cashier’s check?

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Yes, we believe your bank is liable for the cashier’s check.

The Illinois Supreme Court has held that a cashier’s check is the equivalent of cash. As a general rule, once a cashier’s check enters the stream of commerce, the issuer (your bank) is liable under the Uniform Commercial Code (UCC) if it refuses to honor the cashier’s check when presented. We are not aware of any Illinois court cases that permit an exception to this general rule when a bank’s customer purchases a cashier’s check with ill-gotten funds.

Additionally, we recommend notifying the SBA of the suspected fraud and assessing whether a suspicious activity report (SAR) should be filed in relation to the cashier’s check. OCC regulations require national banks to file a SAR if you suspect a federal criminal violation involving $5,000 or more and there is an identified suspect — in this case, your customer.

For resources related to our guidance, please see:

  • Uniform Commercial Code, 810 ILCS 5/3-411(b) (“If the obligated bank wrongfully (i) refuses to pay a cashier’s check or certified check . . . the person asserting the right to enforce the check is entitled to compensation for expenses and loss of interest resulting from the nonpayment and may recover consequential damages if the obligated bank refuses to pay after receiving notice of particular circumstances giving rise to the damages.”)
  • Midamerica Bank, FSB. v. Charter One Bank, FSB, 905 N.E.2d 839, 844-45 (2009) (“[A] bank has no right to stop payment on cashier’s checks because they are the equivalent of cash. . . . ‘A cashier’s check circulates in the commercial world as the equivalent of cash. People accept a cashier’s check as a substitute for cash because the bank stands behind it, rather than an individual. In effect, the bank becomes a guarantor of the value of the check and pledges its resources to the payment of the amount represented upon presentation. To allow the bank to stop payment on such an instrument would be inconsistent with the representation it makes in issuing the check. Such a rule would undermine the public confidence in the bank and its checks and thereby deprive the cashier’s check of the essential incident which makes it useful. People would no longer be willing to accept it as a substitute for cash if they could not be sure that there would be no difficulty in converting it into cash.’”)
  • OCC Suspicious Activity Report Rules, 12 CFR 21.11(c) (“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. . . .”)