Old Tricks, New Dogs: The Resurrection of the Fraudulent Canadian Cashier’s Check Scheme

Bankers who have been in the game for some time will remember a scam that had great popularity in past decades: the fake Canadian cashier’s check. The most common targets were businesses that routinely shepherd funds to various parties involved in a transaction—title companies, law firms, money managers and the like. In the standard iteration, a new client would contact the business and describe a commercial situation with which they needed assistance. Within a few days after agreeing to assist, the business would receive funds related to the transaction in the form of a cashier’s check drawn on a Canadian bank (even if the new client was allegedly based in the U.S.). Along with the cashier’s check would come instructions for the business to disburse the funds to fulfill various time-sensitive invoices from third parties for seemingly reasonable transaction expenses like shipping costs, import taxes, insurance premiums, purchase price funds, etc. The business would deposit the cashier’s check into their own account and then start making the respective payments according to the client’s instructions.

But of course, none of the invoices were legitimate. The cashier’s check wasn’t legitimate. The client wasn’t legitimate. It was fraud, plain and simple, and money laundering to boot. This scam has been somewhat dormant for some years as electronic payment scams have dominated the fraud landscape, but it is back with a vengeance. While the business usually ends up technically liable for the loss under the laws governing checks and the agreements governing the deposit accounts, community banks often end up taking some or all of the loss to preserve the customer relationship. So, what can banks do to protect themselves and their customers?

First, be mindful of a few basics. Canadian banks do not issue “cashier’s checks” as we American bankers recognize them. They issue “bank drafts” and “certified cheques.” The former is issued and guaranteed by the drawee bank, and the latter is issued by the drawer and backed by funds the drawee bank has frozen in the drawer’s account. While it seems elementary, these basic distinctions can be critical—the wording (and spelling!) on the face of the instrument is often telling.

Second, as with so much fraud, the most critical key to prevention is education for both bank employees and customers. Internally, make sure front-line staff and the back-office deposit team are up to date on the processing of international items generally and this scam specifically. Use visual aids to make sure employees can recognize the hallmarks of fraudulent Canadian items. Community banks typically collect international items through a correspondent (whether facilitated internally or through the core processor), so there is often an extra element of manual processing that regular domestic checks don’t receive. This is the perfect opportunity to scrutinize these items and follow up with the customer to verify their validity. If one of these pops on your deposit reports, give it a second look. The correspondent will almost certainly flag it, too, but it may not be for some time—and by then, any provisionally credited funds are already gone.

We sometimes assume the common targets in this scheme as sophisticated businesspeople who are much too smart to be duped by a scam like this. Unfortunately, though, anyone can be susceptible to the draw of a new client, the promise of good money, and the urgency of a client’s needs. Talk to your business customers and let them know this scam is back. Educate them on how to recognize the red flags and what to do if they receive this type of payment. Encourage them to always call both you as their bank and the purported drawee bank to verify the legitimacy of an international item like this—especially before spending any of the “cleared” funds. Phone calls are cheap and quick; fraud is expensive and seemingly never-ending.

Everyone in this equation needs to appreciate that international items (1) are not subject to the funds availability rules under Regulation CC and (2) do not clear at the same speed as domestic items. Customers are accustomed to the normal funds availability schedule they see disclosed at teller windows and tend to assume this applies to all their deposits without reading the fine print. With respect to that fine print, banks would do well to take a look at their disclosures concerning funds availability for international items. International items often take weeks to clear, particularly when processed through a correspondent. Banks need to make sure that deposit account agreements and funds availability disclosures fully disclose this timing and disclaim liability for the customer’s use of any funds not finally cleared.

As with so many other services, this situation presents an opportunity for community banks to shine and show their value over megabanks. Community banks have more manual control and more interaction with customers than larger institutions and are therefore better positioned to pick up the phone and foil a fraud attempt. As I have said before, no customer has ever complained about taking the extra phone call that saved
them the cost and headache of a six-figure fraud scheme.