Telephone check? Could the Wachovia “demand draft” problem happen to you? Posted by Gail H at 02/06/08 12:57 PM

Did you know that your bank can pay someone from your checking account because that person says you authorized it - even though you never signed a check?

News stories today say that this happened at Wachovia Bank, and that documents from a lawsuit show that Wachovia knew about it.

Consumers Union can't say what Wachovia did or didn’t know, but here is what consumers need to know: The method reported as the means to steal from Wachovia’s customers can occur at other U.S. banks.

Telemarketers tap into consumers’ checking accounts using an obscure, out of date method called the “demand draft” or “remotely created check.” Here is how it works: Step One: You authorize a payment by phone, or a telemarketer falsely claims that you authorized a payment by phone, from your checking account. Step Two: The person you authorized, or the person who is out to steal from you, makes up a check on your account and sends it through the banking system. Wait a minute – someone can create a check on your account and use that check even though you never signed it? Yes.

The crook simply claims that you authorized the check, creates the check or has its processing company create the check, and sends that check through the banking system. This “demand draft” or “remotely created check” is so commonly used by fraudulent telemarketers that in May of 2005 the National Association of Attorneys General asked the Federal Reserve Board to abolish it.

In May 2007, Consumers Union and other consumer groups joined in to try to protect consumers from these oral checks. We asked the Federal Reserve Board to either abolish the remotely created check or at least to give consumers the same protections that consumers already have for debit payments. The key protection now missing for these checks is the right to get a “recredit” – a return of your money – within ten business days after you spot and report a charge for a check that you did not authorize. The protection we already have on our debit cards could be applied to remotely created checks by treating a telephone authorization as an electronic authorization, thus bringing the remotely created check under the protections of the Electronic Fund Transfer Act. Read more about this issue in the consumer group comments at: http://www.consumersunion.org/pdf/oralchecks.pdf.

Remotely created checks are not of sufficient value or convenience today– if indeed they ever were – to outweigh the significant record of abuse. The remotely created check can be used to pay a bill at the last minute, but the same thing can be done now with a debit card. The time has come to outlaw the remotely created check or at least give consumers the same right to get our money back for a fake remotely created check that we have for a false debit card charge.

In the meantime, read your bank statements carefully and report and dispute any error, no matter how small. Thieves sometimes put through a small charge first, and if that works, try again with a larger charge, or put the same charge through to your account every month. If you aren’t happy with how your bank responds, file a complaint at: www.helpwithmybank.gov. For more information on where to complain, depending on where you bank, see: http://www.consumersunion.org/pub/core_financial_services/001370.html.

comments (1)

1 Posted by Barry at 02/07/08 01:23 AM

I looked into this recently. Federal Register Vol. 70, No. 42 says:

"Under the U.C.C., a paying bank may charge a customer's account for a check only if the check is properly payable. A bank generally must recredit its customer's account for the amount of any unauthorized check it pays."

A footnote says:

"...the bank may be able to assert that the customer failed to notify the bank of the unauthorized item with "reasonable promptness" (U.C.C. 4-406(c) and (d))."

I read that one bank requires notice of the unauthorized check within 30 days, but Washington Mutual is one of the banks that doesn't post the time limit, so I emailed them:

"If someone withdraws money from my account with a remotely created check that I didn't authorize, how much time can I wait before reporting it to you if I want the money refunded?"

They never answered the question. They replied with a form letter listing some types of disputes and said "You may call our Forgery Claims department to file your dispute regarding the fraudulent transaction(s)."

Debit cards have problems too. NetSpend issued a card to me, I made one purchase, then they asked me to send ID that I didn't have. I reported them to the Office of the Comptroller of the Currency, got a case number, and haven't heard back for over a year.