Small Business Employee Forged Cheques

Posted Tuesday December 10, 2013

Category: Cheques

Mr. C owned an automotive parts store where he employed an administrative assistant with responsibility for payroll, bank statement reconciliations, and other accounting functions. Over a period of four years, she embezzled $80,000 by writing company cheques to herself or fictitious third parties, depositing them into her personal account using her bank's automated bank machine (ABM).

She hid the transactions from management by manipulating the company's financial records. An independent audit by the bank eventually discovered the fraud and the employee pled guilty to criminal charges.

Mr. C asked his bank (the same one used by his employee) to refund the money that she had stolen. While he admitted that he should have been more vigilant in monitoring his company's finances Mr. C believed the bank shared some responsibility as it did not verify the endorsements. He argued that had the bank attempted to verify the endorsements, the fraud would have been discovered sooner and losses minimized.

The bank agreed that Mr. C was a victim of fraud but declined to refund the stolen amounts, citing the account agreement with Mr. C's business. The provisions held Mr. C responsible for the action of his employees and required him to have reasonable controls to monitor, detect, and prevent losses due to fraud. The bank nonetheless offered the Mr. C $5,000 as a goodwill gesture, which he declined. He then brought his complaint to OBSI.

Complaint upheld

We reviewed the correspondences between Mr. C and the bank as well as relevant laws, court decisions, bank procedures, industry best practices, and other documents including the account agreement. All parties agreed that Mr. C failed in his obligations as outlined in the account agreement. At issue was whether the bank shared responsibility in the losses when it failed to confirm the presence or validity of the cheques endorsements.

Small business account agreements frequently contain provisions that hold the business owner responsible for the actions of their employees, including fraudulent acts. Such provisions must be clear and define each party's responsibilities. Courts have generally interpreted such agreements strictly and, in situations of ambiguity, favour the accountholder.

In reviewing the account agreement, we found provisions relating to forged or authorized signatures but none on forged or unauthorized endorsements. Furthermore, the bank's internal procedures noted it must “verify the legitimacy of the endorsement" when “negotiating a third party cheque." The procedures also instructed employees not to accept a cheque if its endorsement could not be verified.

While we understand the bank's business decision to allow third party cheques via ABM deposit for convenience, in our view the bank's responsibility to confirm or verify endorsements remained in place. If the bank intended to limit its liability for missing or forged endorsements it should have been clearly included in its account agreement.

As a result, we concluded that Mr. C and the bank shared responsibility for the losses. The client was responsible for the actions of his employees, monitoring account activities, and taking responsible fraud prevention steps. For its part, the bank had an obligation to verify the validity of the endorsements on cheques written to third parties irrespective. We apportioned responsibility equally and the bank agreed to compensate Mr. C $40,000, representing half of the loss.


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