VIDEO: Cashing Business Checks
In this Compliance Clip (video), Adam answers a question about cashing checks made out to a business for an individual. In addition, Adam addresses situations where a check made out to a business may be deposited into an account of an individual.
NOTE: As you will see in this video, this question is more a matter of risk so specific questions regarding this should be answered by legal counsel (as we are not attorneys). In addition, applicable state laws may apply, so seek legal counsel.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about cashing business checks to individuals. This week I actually received a question from one of our members asking about cashing business checks to an individual. So you have a check that's made out to a business and an individual wants to cash that, or maybe even the individual wants to deposit that into their personal checking account or savings account, and you do that.
Well, the way the rules are is, technically, your bank or credit union can do this, but this is a terrible business practice to do for a number of reasons. First and foremost, it's a bad idea because of the Uniform Commercial Code. Typically I don't dig into the Uniform Commercial Code, I deal with consumer protection and the UCC, something is a little bit different, but it's my understanding that you can have problems if you are allowing a check made out to a business to get deposited into a personal account. In fact, whenever you are depositing a check into an account where there's a different name on the check than where you're depositing it, that could be a problem, and you could actually owe money in the event that somebody tries to come and recover the funds that were deposited into the account or cashed by your bank. That's the first concern.
The second concern is there are some potential liabilities that come with this. For example, talking about depositing checks into a personal account, when they’re made to a business, I've seen examples over the years, at clients that I've worked with. One example was one like this. There was a furniture company called ABC Furniture. Let's even say Witmer Furniture, my name is Witmer so let’s call it Witmer Furniture. The family of Witmer had owned this furniture business for years. Great grandfather of Witmer had founded it, and the father of Witmer had owned it, and now son Witmer has taken over the business and runs it. Everybody knows the Witmer Furniture belongs to the Witmer family. What you don't know is behind the scenes, the majority shareholders have changed. In fact, the Witmer family, the current generation, has sold all their shares, but they're still currently running the business. I saw this exact scenario at a financial institution I was working with where what had happened was one of the family members that used to own the business was working in the accounting department and every now and then they would grab checks, made out to Witmer Furniture, whatever the name of the furniture company was, takes it to the bank and deposits it in their personal checking account.
Eventually what happened is the ownership figured this out. And I think that person was fired. They figured it out and there was a lawsuit where the bank was subpoenaed and the bank had to end up providing all the records and ended up essentially having to refund everything they had deposited by that person who they thought owned the business. Because, again, it was Witmer Furniture into a personal account of Adam Witmer, but in fact Adam did not own the business, and that became problematic. So there can be some potential liabilities that can be a major challenge.
Also, could you be held in contempt of the court? Well, what I’ve heard stories of over the years is when a court sends you a subpoena, and you have to dig up all the checks that you either cashed for a customer or deposited into their accounts, if you do not provide all of those checks, I've heard, and I would consult with an attorney because I am not one and don't pretend to be one, but I have heard that, if in fact, you don't provide all the checks that apply and later they determined there were some that you didn't provide, then your financial institution could be held to be in contempt of the court.
To me, they are big enough risks where I would not want to mess around with depositing business checks into the account of an individual or even cashing business checks, unless your organization felt extremely comfortable that you know who you are dealing with. Even then you still have risks.
The bottom line is, can you do this? The answer is it's a risk based decision but there are some major potential consequences that could come about if, in fact, you are having problems with understanding who the ownership is. Even if you think you know who they are, you could end up being in major problems so it’s a bad business practice and most in the industry call it a terrible business practice.
That's all we have for today on this Compliance Clip. I’m talking about cashing business checks for individuals who are not in the name of the business.