Demand Drafts: Fraud Alert

We are familiar with Demand Drafts, and we believe that they are safe, and will never bounce (be returned unpaid). However, a client recently found that this is not true, and realised that bank drafts could also be fraudulent. This is his story in short, with a lesson for you on how what precautions you should take to save yourself from such a fraud.

This client had a customer who bought goods from him but was habitual in delaying payments. One day he placed a big order (Rs 30 lakhs plus), but this client, refused to deliver goods without advance payment. The customer requested repeatedly and tried to convince, but this client did not budge.

Eventually, the customer said he will give a demand draft of his bank, which he will draw from a loan against his property. He asked to keep this as a security and assured him that he will deposit money directly in 15 days, after which he will take back the demand draft. If not paid in 15 days, he can deposit the demand draft. Anyway, as it is a demand draft of the bank, it will not bounce in any case, he assured.

This client agreed and took the demand draft. Please note that the demand draft was issued by one of the top three private banks in India. He started getting the goods ready. However, his smart accountant wasn't too comfortable. He asked the client to delay delivery by a couple of days.

The accountant had a friend in the city where this demand draft was issued from. He sent a photo of the demand draft to his friend and asked him to visit the issuing branch to confirm its authenticity. The friend visited the branch and came back with a shocker.

The demand draft was authentic but would have bounced (returned unpaid). It turns out that two days after issuing this demand draft, the customer informed the bank that the demand draft was misplaced and instructed the bank to cancel the same. The bank acted on these instructions and canceled the demand draft. He then handed over the demand draft to this client.

So the lesson here is...

1. Do not blindly believe the demand draft you get.
2. Verify the authenticity of the demand draft before you take any action based on it.
3. Wherever possible, take action only after it is encashed into your account!