The Cheque Is No Longer in the Mail: Risks and Developments Relating to Cheque Imaging
The Canadian Payments Association (the "CPA") recently issued a 4 part article series on the security implications of image-based cheque clearing, in particular relating to duplicate items. Image-based cheque clearing is possible in Canada as a result of the CPA's Image Rule Project, a four-phase initiative that aimed to provide Canadian financial institutions with the option to clear cheques electronically, by way of image-based cheque clearing. More recently, Canadian financial institutions have begun offering Remote Deposit Capture, which allows customers to deposit a cheque by taking a picture of the cheque on their phone and submitting the picture image instead of the physical cheque.
While cheque imaging is a fairly recent initiative in Canada, in the US cheque imaging was introduced more than 10 years ago, in 2004 (as a result of Check 21) and nearly all cheques in the US are now cleared electronically. The CPA consequently turned its attention to the lessons learned in the US as a result of its experience. US financial institutions have found that the number of duplicate items increased much more significantly than had been anticipated as a result of the move to image-based clearing. Three main causes have been identified: internal bank duplication (due to internal processing issues or employee error), fraud (where for example the same cheque image is deposited at multiple financial institutions) and unintentional customer duplication (where customers accidentally submit the same cheque multiple times). As a result, the focus in the US has been on enhancing duplicate prevention and detection, establishing and maintaining robust rule frameworks, and clarifying responsibilities. The same concerns would also apply in Canada, particularly as cheque imaging becomes more prevalent.
Key Policy Considerations
In the final article of the series, the CPA outlines what it sees as the key policy considerations for the Canadian payment systems in connection with duplicate items: access to deposit accounts should be safeguarded, the effectiveness of financial institutions' know-your-customer policies and practices should not be impeded, and the roles and responsibilities of the various parties involved in a payment transaction should be considered. Based on these policy considerations, the CPA suggests that certain regulatory and legislative changes should be considered in light of the move to cheque imaging:
- It may be appropriate to amend the definition of "duplicate" in the CPA rules. The definition now reads "an authorized Item that has been paid more than once". It may be more appropriate to refer to presentment rather than payment.
- The 90-day return timeframe for duplicates under CPA rules should be reconsidered to determine if it remains appropriate in a cheque imaging environment.
- Legislators should consider amendments to the Bills of Exchange Act, in order to clarify the references to "holder in due course" and to update certain other provisions of relevance, including those relating to "crossed cheques".
As cheque imaging becomes more popular in Canada and the risk of duplicate items becomes correspondingly larger, some or all of such regulatory and legislative changes could be implemented. Regardless of whether this is the case however, financial institutions will need to remain focused on the prevention and detection of duplicate items in order to minimize the losses that could be sustained as a result of the duplicate items.
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