(by Geck Finn)

Checking account fraud cost US banks USD 698 million in 2002, according to the American Bankers’ Association, while those perpetrating the fraud attempted to take USD 4.3 billion in total. Identity theft cost financial institutions USD 47.6 billion in 2002-03, the FTC reports, and affected 9.9 million Americans in that period. With over 10 billion electronic transactions now cleared over the US payment system every year, and the rise of automated checking account withdrawals and deposits, the Federal Reserve warned banks last year that criminals are using the ACH system to originate unauthorized debits and payments.

Banks have difficulty resolving customers’ claims of unauthorized withdrawals from checking accounts, as no federal rules exist for cases of a customer disputing an unsigned paper check. While banks may argue that the use of the correct account number is proof that the payment was authorized, the number can be obtained from the numbers at the bottom of a check or from an insecure web site. For this reason, the Fed may draft rules to make a merchant’s bank liable for any unauthorized charges made with unsigned checks (a demand draft), instead of allowing the bank to decide whether to refund the money to the account.

Twelve US states currently require the merchant’s bank to be liable for any unauthorized demand drafts, but the Fed wants to extend this rule nationwide in an effort to make banks face up to the issue. Given FTC warnings that bank account information is illegally circulated via the Internet in the form of lists, US consumers are being advised to monitor their monthly statements. The American Bankers Association, for its part, admits that the payments system is built on trust, and that weaknesses exist, but emphasizes that consumers are protected by laws, even if banks need convincing of the validity of a customer’s claim.