The idea of "certified funds" is pretty simple: For a small fee you can get funds certified, usually through a bank, which issues a "certified check" you can then pay to another party. Your bank's cetification guarantees it will honor or cash the certified check or related "certified" document. Like many things in life, however, although the idea's straightforward, the execution sometimes isn't. The two most common forms of funds certification are certified checks and bank letters of certification. Both are susceptible to fraud.
What Are Certified Funds?
The most common instance of certified funds is a certified check used to guarantee a payment. For instance, you're buying a used car from a private party in a neighboring state. You could draw the money out of your bank and pay the buyer in cash, but traveling with a lot of cash is risky. You could write the buyer a personal check, but the buyer probably isn't going to let you drive off with the car until he knows the check is good.
The work-around – in theory at least – is to pay the buyer with a certified check, which guarantees that the bank that issued the check will cash it. The way this works is you go to your bank's local branch (this is one of those instances where it's probably simpler and less aggravating to execute the transaction in person). You explain to the teller that you want a certified check in the given amount. The teller verifies that you have funds in your account to cover it and then hands you a certified check, which you sign in the teller's presence. The check itself is usually made payable to a second party, in this instance the person selling you the car. In the process, the bank also puts a hold on your account in the amount of the certified check. When the check is cashed, the hold is removed.
Another common kind of funds certification, one sometimes used in real estate closings, is a letter of certification from your bank guaranteeing the payment. The medium is a little different, but the message is the same: upon appropriate demand the bank issuing the letter will pay to the presenting party (a real estate buyer, for instance) the amount guaranteed in the letter. As with the issuance of a certified check, when the bank writes a letter certifying funds it also puts a hold on your account for the amount certified.
Technically speaking, both a certified check and a cashier's check provide certified funds. The only difference between the two is that you sign the certified check and the bank signs the cashier's check. Both – again, in theory – are equally acceptable.
What Could Possibly Go Wrong?
Earlier information articles often made a point of distinguishing between a certified check and a cashier's check, noting that a casher's check signed by the bank is more reliable than a certified check signed by the issuing bank's customer.
In the digital information age, however, they're both equally reliable – meaning, really, that they're both equally unreliable. With the democratization of digital printing, anyone with a digital printer and handy with Photoshop can forge a cashier's check, a money order, a letter of certification or a certified check.
Few everyday examples of such fake documents would fool a trained professional, but there are two problems with that assurance: Unless the amount of the forged document is quite high, it'll probably be processed by a bank teller with no special training who will accept the document and enter the deposit in the customer's account. What happens next is that that check is kept at the bank until the end of the banking day and then the check or its fully digital equivalent is sent overnight to the issuing bank for collection. If it's NSF, meaning there are insufficient funds to pay it, the receiving bank then notifies the sending bank that the check is uncollectible.
If the check has been forged, by the time you realize that it's being returned and the amount debited back to your account, the forger is long gone.
Forgery involving certified documents isn't rare either; according to an Association of Finance Professionals report, 75 percent of reporting U.S. banks experienced check fraud in 2016, and it's rising year after year.
Fortunately, there's a painless solution: wire transfers accomplish the same thing – transmission of guaranteed funds from your account to a recipient account – for the same cost or only a little more. From your viewpoint, the process is similar, except that you can do the whole transaction online: You stipulate the amount you want to wire, giving the recipient's name, address and the details of their account, usually branch number, institution number and address. The usual charge is $25 for same-day transfers.
In an age of widespread check fraud, some states, Ohio for one, are passing laws requiring wire transfers and disallowing certification guarantees in all real estate transactions. Creating a fake certified check used to take some degree of skill, but in the age of Photoshop it's just too easy!
- TD: How Do I Send a Wire Transfer
- Bankrate: Certified Check vs. Cashiers Check – What’s a Safer Payment Option?
- OCC:Avoiding Cashier's Check Fraud
- JPMOrgan:2017 AFP:Payments Fraud and Control Survey
- Consumer Financial Protection Bureau. "I Deposited a USPS Money Order, Cashier's Check, Certified Check, or Teller's Check. When Can I Access This Money?" Accessed June 14, 2020.
- Office of the Comptroller of the Currency. "Avoiding Cashier's Check Fraud." Accessed June 13, 2020.
- HelpWithMyBank.gov. "The Bank Placed a Hold on a Cashier's Check That Later Turned Out To Be Fraudulent. Aren't Cashier's Checks Supposed To Be Honored Immediately?" Accessed June 14, 2020.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.