Stale-dated checks ripe for fraud, investigation finds.

A recent investigation by the U.S. Attorney's Office for the District of Maryland has uncovered a novel type of fraud whereby local governments are recruited to be unwitting co-conspirators in their own losses.

The fraud involves stale-dated checks issued by local governments. A stale-dated check is one that was not negotiated within the life of the check, usually 90 to 180 days. Checks become void if they are not negotiated within the timeframe stated on the check. Most local governments maintain a registry of stale-dated checks, recognizing that their liability to a vendor does not end until the check is negotiated.

Local governments routinely re-issue a check payment upon the request of a vendor once they have confirmed that the check has not been negotiated. Many honor requests for repayment from third-party collection agents acting on a vendor's behalf, as long as the third party can provide specific information from the original check and proof that it is authorized to receive payments for the vendor.

Many governments broadly interpret public information requests to include providing information on stale-dated checks. For a nominal fee, many local governments will provide a list of stale-dated checks (some even post them on their Web sites). Usually, this information includes the vendor's name, the date of the check, the check number, and the amount--the same information needed to request a re-issued check.

Some individuals have fraudulently used stale-dated check information to request re-issued checks from municipalities. These individuals pose as legitimate third-party collection agents, using forged power of attorney documents to request and deposit re-issued checks. To date, city and county governments across the United States have been victimized by this fraud.

Others have targeted surpluses owed to debtors by local governments from the seizure and sale of properties that were delinquent on their property taxes. Many local governments routinely provide listings of these accounts, which can then be used by fraudulent third parties claiming to represent the interests of the intended recipients.

The potential gain from this type of fraud is enormous, since local governments are sitting on stale-dated checks amounting to hundreds of millions of dollars. Local governments can avoid joining the list of victims by limiting the information provided on stale-dated check lists, particularly dollar amounts; contacting vendors to verify the legitimacy of third-party collection agents; and imposing strict procedures on re-issued checks, such as requiring a copy of the original invoice and sending the checks to the vendor instead of to the third party.

Local governments that encounter this type of fraudulent activity are encouraged to contact federal authorities. For more information, contact Robert Sheehy at the U.S. Attorney's Office for the District of Maryland, (410) 209-4884 or Robert.Sheehy @usdoj.gov.