The Legality Of Cashing Corporate Checks

Following are a couple links where other gurus have answered this question before:
http://www.bankersonline.com/compliance/gurus_cmp1203p.html
http://www.bankersonline.com/operations/gurus_op0319i.html

You will notice neither of the earlier respondents gave a citation to law or regulation. Like a lot of things, this is not "against the law." It's just an exceptionally poor banking practice that subjects that bank to an inordinate amount of risk.

Corporations confer power by passing resolutions and naming people to act on their behalf. There may be a resolution that says you can sign official checks up to $100,000 for your bank. However,that grant does not give you authority to make someone a loan of $2,500 even if it is secured by an own bank time deposit. Different employees have different powers. You have the power you were given, but no additional powers are implied.

The corporate employee who signs on the account (or even the owner of the corporation) does not have the power to cash checks payable to the corporation unless there is a corporate resolution that says so. (It is unlikely that any corporation would ever adopt such a resolution because it is a traceable path to theft or income tax evasion.)

If your institution knowingly allows someone to divert the funds from the true owner, you would reasonably expect to be found liable for that. If Ken came in with a check payable to Mary Beth, you would not let him sign her name and walk out the door with the proceeds. If Ken came in with a check payable to Pegasus, your analysis and the result should be identical. (If it isn't, be prepared to meet my partners under unpleasant circumstances.)

Although it is not against the law to cash a check for a corporation, there are a number of cases based on fraud and bankruptcy that indicate the bank should have known better…

First published on BankersOnline.com 2/11/02