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Forged Instruments

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

Checks, drafts, bills of exchange, notes, bonds, stock certificates, and paper money with false signatures or false denominations; false instruments with genuine signatures; or COUNTERFEITS.  To minimize losses due to forged stock and bond certificates, the New York Stock Exchange requires all certificates of stocks and bonds listed to be engraved with quality and standards satisfactory to the Department of Stock List.  Further, the exchange requires the company applying for listing to maintain a separate and independent transfer agent or office and registry office or registrar in the financial district, the function of the registrar being to authenticate certificates issued and check against over-issuance of authorized amounts.  Also, all certificates (stocks and registered bonds) must carry signatures, guaranteed by a member, member firm, or commercial bank or trust company having principal office in the financial district of New York City.

The Uniform Commercial Code specifies that the bank's customer, upon receipt of the usual monthly bank statement accompanies by cancelled checks or other honored items, shall within a reasonable time examine the items to discover whether any of the customer's signatures are forgeries or unauthorized or whether any of the items have been altered.  If the customer fails to do so, the bank cannot be charged for honoring such a challenged item as to unauthorized signature or any alternation if the bank also establishes that it suffered a loss by reason of such failure.  Moreover, if the customer fails to discover and report the unauthorized signature or alternation after the first item and statement were available to the customer for a reasonable period not exceeding 14 calendar days, the bank cannot be held liable for any further payments made to the wrongdoer before the bank is notified by the customer.  the foregoing protection for the bank is notified by the customer.  the foregoing protection for the bank does not apply if the customer establishes lack of ordinary care on the bank's part in paying the items.  But regardless of care or lack of care of either the bank or the customer, failure by the customer to discover and report unauthorized signature or alterations one year from the time the statement and items are made available or failure within three years to discover and report any unauthorized endorsement will preclude action against the bank (Sec. 4-406, Uniform Commercial Code).

Since paying a forged check is one of the chief risks with which a bank is confronted, banks should educate their depositors to protect their blank checks as a means of combatting this risk.  Depositors should keep blank checkbooks under control and be able to account for each of the series.  Checks should not be signed in blank nor should blank checks be given away to strangers.


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