The November 6, 2014 appellate decision of HH Computer Systems v. Pacific City Bank is a strong reminder of the need to protect the checks that come into your business to pay you. In HH, an employee who received the mail, over a period of a year, took $650,000.00 in checks to be paid to her employer, and cashed them at various check cashing shops. The opinion described in detail Karen Kane, Inc. v. Bank of America decision where the employee had set up fake companies to which he got the company to pay checks for expenses that never really happened, totaling $760,000.00.
The point of this memo is that these two appellate decisions show that such thefts of employers' funds are still happening. You need to have systems in place to protect against these two forms of stealing.
When I explain a financial procedure to someone in my office, I tell the person that she or he would not be working for me if I did not trust that person completely. The procedure is in place so that if my employee's spouse or good friend has a close relative or friend who gets into serious financial trouble, maybe even with a group that will break a leg in order to get paid, my employee could not steal from me, even if he or she decided that he or she had to. Safe systems protect everyone.
In HH, the employer was trying to obtain reimbursement for his loss from the first bank which received the checks from the employee. The Uniform Commercial Code requires the bank at which the check is deposited to check the endorsement. The UCC also requires the bank on which the check is drawn to check the signature on the front of the check. The intermediary banks which pass the check along are not required to do either. The first bank tried to get out of the lawsuit by arguing that it was not the first bank, because the check cashing shop initially cashed the check. The court held that check cashing shops are not banks. Therefore, the protection for intermediary banks did not cover the first bank.
Check your checks and electronic transfers, incoming and outgoing, receivables and payables. There is no substitute for diligence.