So, what can financial institutions do to fight fraud while complying with Reg CC?
Nothing in Reg CC affects a financial institution’s right to accept or reject a check for deposit, regulators have noted. Strong know your customer (KYC) training and ongoing customer due diligence (CDD) compliance are essential for this approach. Ensure bank or credit union staff, from the teller line to the fraud staff, are familiar with check-kiting red flags and other check fraud detection tips.
Reg CC also doesn’t affect the right to revoke settlement, charge back accounts for returned or unpaid checks, or charge back electronic payments if the institution doesn’t receive “actually and finally collected funds.”
Suppose circumstances surrounding suspected check fraud or other types of fraud don’t “fit” the exceptions tied to new accounts, large deposits, or redeposited checks. In that case, financial crime professionals can also consider using the exception for “reasonable cause to doubt collectability” to extend the hold time. Indeed, commentary following Reg CC gives additional detail on this exception, including providing examples of when checks can be held, including being held for suspected check fraud.
“This exception applies to local and nonlocal checks, as well as to checks that would otherwise be made available on the next (or second) business day,” according to regulators' commentary. “When a bank places or extends a hold under this exception it need not make the first $100 of a deposit available for withdrawal on the next business day.”
Financial institutions can rely on “a combination of factors that give rise to a reasonable cause to doubt” that the check will be paid, the commentary continues. Among examples, some of which could tie to fraud scenarios, for which institutions can invoke the “reasonable cause” exception:
- The bank or credit union receives a notice from the paying institution that a check was not paid and is being returned.
- The paying bank provides information before the check is deposited that gives the depositing institution reason to believe the check is uncollectible. This includes a stop payment notice.
- A check is deposited more than six months after the date on the check.
- The financial institution has confidential information that leads it to believe the check will not be paid. “For example, a bank could conclude that a check being deposited is uncollectible based on its reasonable belief that the depositor is engaging in kiting activity,” Reg CC commentary says. “Reasonable belief as to the insolvency or pending insolvency of the drawer of the check or the drawee bank and that the checks will not be paid also may justify invoking this exception.”
One important directive related to the “reasonable cause” exception is that a determination of uncollectibility cannot be based on “a class of checks or persons.” For example, it can’t be based on the depositor’s race or national origin. Another example: A depositary bank can’t invoke the exception because the check is drawn on a rural bank, even if it means it won’t have the chance to learn of nonpayment before the deadline to make the funds available.
Financial institutions have tremendous responsibilities when it comes to preventing and detecting fraud. Knowing Reg CC’s requirements for funds availability and when exceptions can be made is essential for financial institutions to balance regulatory compliance for AML and consumer interests.
