A common fraud perpetrated on financial institutions is the deposit of counterfeit cheques. The account holder distances themselves from the fraud by portraying the payment as one they thought was part of a legitimate transaction. The funds are often withdrawn or transferred before the cheque is returned as counterfeit, usually within a matter of days. After the transaction is reversed and the customer’s account is well overdrawn, the financial institution is left to try and recover the funds from its customer. In hindsight, there are often red flags that were overlooked.
One such warning is an urgent inquiry by the customer about whether the funds have cleared or whether the cheque is “good”. The answer to queries like this can make the difference between recovery by the bank or liability for the loss once the fraud is discovered.
A recent Ontario decision, Oak Incentives Group Inc. v. Toronto Dominion Bank resulted in judgment against the bank for a loss caused when its customer unwittingly accepted a counterfeit deposit into its account. There are several surprising aspects to this case but at its core the bank was found liable for breach of a duty of care owed to its customer. That liability arose because of what the bank’s employees knew about the transaction, said and did not say to the customer.
Oak Incentives was a long term customer buts its account did not have a history of large deposits or transactions. Oak Incentives was approached by a Mr. Lim who wished to purchase $200,000 worth of Sony televisions. Mr. Lim was told payment in full had to be received before the product would be shipped. Mr. Lim said he would wire the funds directly to Oak Incentives’ account. As a result, Oak Incentives, which did not have familiarity with wire transfers, inquired of the branch manager whether a wire transfer was a safe and secure method of payment. The branch manager was told about the proposed transaction and, in particular, that the order was a rush delivery requiring confirmation of full payment before the product could be delivered. The branch manager assured Oak Incentives a wire transfer was safe and secure.