In Part 1 of this series, we discussed the importance of understanding and managing the risk of duplicate payment items (duplicates) in the cheque imaging world, and how the CPA opened industry dialogue on this issue in Canada. In Part 2, we shared lessons learned from the U.S. since their transition to imaging. These lessons can help the CPA and its member institutions monitor and manage duplicate risk effectively while maximizing the benefits of imaging for Canadians.
One key concern for the U.S. is improving duplicate prevention and detection, as the pain point of resolving duplicate issues is high for both financial institutions and their customers. In this article, we examine opportunities to prevent and detect duplicates in Canada during the payment journey. We also examine recourse elements of the current Canadian legal framework. Considering the U.S. experience, will this framework continue to serve Canadians well?
Opportunities to prevent and detect duplicates
At the depositing customer's bank
Duplicates can be prevented at the depositing customer's bank through effective cross-channel duplicate monitoring. This includes deposits made at the bank machine, in-person and via Remote Deposit Capture (RDC) solutions such as apps that enable deposits by taking pictures of cheques with a smartphone. Effective know your customer (KYC) policies can also help ensure that only legitimate payment items are entered into the clearing.
At payment processing centers
Payment processing centers serving Canadian financial institutions (FIs) are ideally situated to prevent and detect duplicates during the highly automated payment sorting and exchange processes.
At the paying customer's FI
FIs are responsible for safeguarding access to the deposit accounts of their customers. After clearing, cheques are presented to the paying customer's FI so the FI can decide whether the cheque will be honoured. This is known as the "pay/no-pay" decision. The paying customer's FI has the opportunity to detect duplicates at that time as well as during the account posting process.
Customers can also help by using cheques with serial numbers that don't repeat too often, as these can be used to help detect duplicate payments from their accounts. Customers can also closely monitor their own account activity, and report any duplicates to their FI.
The current legal framework
Under current CPA rules1, "Duplicate Payment" means an item that has been paid more than once. This may occur in situations where:
- an original and either an image, image printout or a photocopy have been paid;
- an original item has been paid more than once; or
- an image, image printout or a photocopy has been paid more than once.
A cheque writer's FI can reject and return a duplicate to the depositor's FI via the clearing for up to 90 calendar days. This is consistent with return time frames for other issues caused by FI internal error, such as when a cheque is accidentally cleared in the wrong currency. But will it remain appropriate in the imaging environment?
Bills of Exchange Act and Holder in Due Course
The Bills of Exchange Act (BEA) contains certain "holder in due course" provisions designed to protect the rights of people that accept cheques as payment. But the BEA was written long before cheque cashing stores became commonplace and RDC services entered the marketplace. Today, the holder in due course provisions expose cheque writers to significant risk if their cheque passes into the hands of someone dishonest.
For example, say you hire a fraudster posing as a contractor to replace the tiles on your kitchen floor. He needs to purchase materials in advance of the job, and asks you to write him a $1000 cheque to cover the cost. He then vanishes with your cheque and never returns, so you call your bank and put a stop payment on it. The fraudster takes the cheque to a cheque cashing store, which has no idea there's any issue with the payment. He signs the back of the cheque and gives it to them. The store becomes a holder in due course. The store gives him the funds (minus the fee they charge for providing their cheque-cashing service) and deposits the cheque at its own bank to collect payment from yours. When your bank returns the cheque to the store's bank for the reason "payment stopped", the cheque cashing store can seek, and may be able to obtain, the funds from you, under the Bills of Exchange Act.
In the cheque imaging world, the risk associated with the holder in due course provisions becomes even more pronounced. A fraudster could deposit cheque images at multiple FIs via RDC before taking the paper cheque to the cheque cashing store. How will the holder in due course provisions apply?
Stay tuned for the next article where we'll examine key policy considerations in greater detail and discuss which elements of the Canadian framework may need to change in the imaging environment.
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1CPA Rule A4 - Returned and Redirected Items back to reference