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Remote Deposit Capture—The Dark Side | SAFEChecks | Articles

Remote Deposit Capture—The Dark Side

Check 21’s Final Rule includes an “Indemnity” provision that seriously affects an organization’s liability for check fraud, under certain conditions. Because this provision is buried on page 58 of 114 pages, few people are aware of it or understand its implications. Organizations that understand the Indemnity are often motivated to use high security checks. The following is a brief explanation of the Indemnity provision.

Check 21 gives financial institutions the right to convert the paper checks they receive into electronic images, to process those images for payment instead of the original paper checks, and to destroy those paper checks after an undefined period of time. If necessary, the paying bank or its processor can re-convert the electronic image into a paper document known as a “substitute check” or Image Replacement Document (IRD).

The right to convert the original check into an image raises the question, “What if a fraudulent or altered check is converted and then shredded?” The Indemnity provision addresses that question.

The Indemnity provision says that if a loss occurred because the paying bank received an electronic image or a substitute check (IRD) instead of the original check, an Indemnity claim can be filed against the bank that presented the substitute check to the paying bank IF two conditions are met.

First, the original paper check had to have security features that could not be seen in the electronic image or substitute check. These are features that “do not survive imaging” and include features such as a true watermark, thermochromatic ink, chemical sensitivity, etc. These are some of the best features to prevent check fraud.

Second, the dollar amount of the check had to be sufficiently high that the paying bank would have physically inspected the check for those security features to verify its authenticity, if it had received the original check instead of a substitute check or electronic image. This is known as the Sight Review process. Every bank sets its own Sight Review threshold. One bank might inspect every check over $5000, and a different bank might inspect every check over $25,000.

Both conditions must be met to make an Indemnity claim. The Indemnity is valid for one year from the date the injured party discovers the loss (not from when the check was written). Note that under the exact same fraudulent situation, if the original check did not have the proper security features, it would not qualify for the Indemnity.

How does this relate to Remote Deposit Capture? The party that converts the paper check into an electronic image “issues” the Indemnity. Under RDC, the bank authorizes its client to electronically image the checks, not the bank. The company scans the checks it would normally send to the bank for deposit, and then electronically transmits the check images to the bank for deposit/collection. The bank processes the images and sends them to the various paying banks for collection. After a period of time, in our opinion not less than 60 days, the company can destroy the original paper checks.

Under the Check 21 Indemnity provision, the entity that originally converts the paper check into an electronic image provides the Indemnity. While there are many benefits for using RDC, companies should understand the risks and weigh the benefits against those risks. One risk is the obligation of providing an Indemnity for at least one year against certain types of check fraud.


(For in-depth information, read “Check 21, Remote Deposit Capture and Check Fraud,” written by Frank Abagnale and Greg Litster, and reviewed by the Federal Reserve Board. Visit www.fraudtips.net.)

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