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RBI prescribes measures for banks to prevent cheque frauds

In view of the rise in the number of cheque related fraud cases, the Reserve Bank of India has asked banks to put in place preventive measures including sending an SMS alert to payer/drawer when cheques are received in clearing.

Further, to prevent cases of suspicious or large value cheques (in relation to an account’s normal level of operations), the central bank has advised banks to alert customers by a phone call and get the confirmation from the payer/drawer.

The RBI has told banks to ensure the use of 100 per cent CTS (cheque truncation system) – 2010 compliant cheques.

Under the CTS environment, electronic image of the cheque is transmitted to the drawee branch through the clearing house, along with relevant information such as data on the MICR (magnetic ink character recognition) band, date of presentation, and presenting bank. Cheque truncation obviates the need to move the physical instruments across branches.

According to a RBI notification on preventive measures for cheque related fraud cases, banks are required to strengthen the infrastructure at the cheque handling Service Branches and bestow special attention on the quality of equipment and personnel posted for CTS based clearing, so that it is not merely a mechanical process.

Banks have to ensure that the beneficiary is KYC (know-your-customer) compliant so that the bank has recourse to him/her as long as he/she remains a customer of the bank.

The RBI said banks should put in place a mechanism whereby all cheques beyond a threshold of say, Rs. 2 lakh are examined under UV lamp. Checking should be done at multiple levels, of cheques above a threshold of say, Rs. 5 lakh.

The threshold limits mentioned above can be reduced or increased at a later stage with the approval of the Board depending on the volume of cheques handled by the bank or its risk appetite.

Banks are required to closely monitor credits and debits in newly opened transaction accounts based on risk categorization.

In its notification, the RBI said “the rise in the number of cheque related fraud cases is a matter of serious concern. It is evident that many of such frauds could have been avoided had due diligence been observed at the time of handling and/or processing the cheques and monitoring newly opened accounts.”

Therefore, banks have been advised to review and strengthen the controls in the cheque presenting/passing and account monitoring processes and to ensure that all procedural guidelines including preventive measures are followed meticulously by the dealing staff/officials.

Referring to some cases where even though the original cheques were in the custody of the customer, cheques with the same series had been presented and encashed by fraudsters, the RBI said banks should take appropriate precautionary measures.

The precautionary measures have to ensure that the confidential information — customer name/account number/signature, cheque serial numbers and other related information are neither compromised nor misused either from the bank or from the vendors’ (printers, couriers etc.) side.

The RBI also said due care and secure handling is also to be exercised in the movement of cheques from the time they are tendered over the counters or dropped in the collection boxes by customers.

Source: Business Line

Useful Information on Cheque Bouncing

CHEQUES

Cheque is a negotiable instrument.  Normally, cheques are issued either for the reason of statutory requirement or for the reason of securing proof of payment.  Crossed and account payee cheques are not negotiable by any person other than the payee.  It has to be deposited into his bank account.  In legal parlance, author of the cheque is called ‘drawer’, the person in whose favour it is drawn is called ‘payee’ and the bank who is directed to pay the amount is called ‘drawee’.  It is always safe to issue crossed “Account Payee Only” cheques in order to avoid its misuse.  Blank cheques are not safe.  It is better to date the cheque invariably.  A cheque is valid for payment only for six months from the date mentioned in the cheque.  After the period of six months, such a cheque is called ‘stale cheque’.

BOUNCING

A cheque becomes due for payment on the date mentioned on it.  Before issuing a cheque author of the cheque should ensure that he has sufficient funds in his account. Lest, it would bounce with remarks ‘insufficient funds’.  Bouncing in common parlance is referred to dishonour of  cheques.

WHAT HAPPENS WHEN A CHEQUE IS DISHONOURED?

Immediately upon dishonour the drawee bank issues a ‘Cheque Return Memo’ to the banker of the payee citing the reason for non-payment.  In turn the payee’s banker shall handover the dishonoured cheque and the memo to the payee.

WHAT IS TO BE DONE THEN?

The payee has an option open to him either to re-present the cheque if and when he thinks the cheque could be honoured but within six months from the date of the cheque or proceed legally to prosecute the drawer.  The payee may prosecute the drawer for dishonour of cheque only if the amount mentioned in the cheque is towards discharge of a debt or any other legal liability of the drawee towards payee.  Mere issuance of a cheque say for the purposes of gift, or towards lending a loan or for unlawful purposes would not amount to legal liability and the drawer cannot be prosecuted in such cases.

TO PROCEED LEGALLY

If he decides to proceed legally, then the drawer should be given an opportunity of making good the cheque amount immediately.  Such an opportunity has to be afforded only by means of a notice in writing.

LEGAL PROVISIONS

Under Section 138 of the Negotiable Instruments Act, 1881 as amended up to date, the notice has to be sent by the payee to the drawer in writing within thirty days from the date of receiving Cheque Return Memo from the bank and demand the cheque amount to be paid to him within fifteen days from the date of receipt of such a notice by the drawer.

CONDITIONS FOR PROSECUTION

Law prescribes certain conditions to be fulfilled in order to attract provisions of Section 138.

A) The cheque should have been drawn by the drawer on an account maintained by him.

B) It should have been returned unpaid either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank.

C) Cheque must have been issued towards discharge of a debt or legal liability.

D) If after receiving the notice, the drawer does not make payment within fifteen days from the date of receiving such a notice, then he commits an offence punishable under Section 138 of the Negotiable Instruments Act.

PUNISHMENT

Punishment prescribed for such an offence is fine which may extend to twice the amount of the cheque or imprisonment for a term which may be extended to two years or both.

FILING COMPLAINT

If the drawer makes payment of the cheque amount within fifteen days from the date of receipt of the notice, then drawer does not commit any offence.  Otherwise, the payee may proceed to file a complaint in the court of the jurisdictional magistrate within one month from the date of expiry of fifteen days prescribed in the notice.

If the payee fails to file the complaint within thirty days, the complaint becomes barred by limitation of time.  The jurisdictional magistrate court may refuse to entertain such a belated complaint.  However, if the payee has sufficient reasons to justify delay in filing the complaint, he may make an application before the magistrate along with the complaint, to explain the reasons for delay and seek condoning of delay.  Cognizance of the complaint may be taken if the Court is satisfied that the payee had sufficient cause for not making the complaint within the prescribed period.

After the complaint is filed and taken on record the proceedings against the drawer begins.

CIVIL ACTION

The payee may also initiate money recovery procedure in a jurisdictional civil court apart from prosecuting the drawer for criminal offence.  It is essential in this case to consult an advocate who is well versed and experienced in this area of practice to proceed further in the matter.

FINER POINTS

The procedure of filing complaint and prosecuting the drawer in a court of magistrate involves certain finer points like cause of action, preparation of legal notice and complaint in accordance with legal requirements, modes of sending the written legal notice, service of summons and non-bailable warrants, conducting the criminal case etc.  It is advisable to consult an advocate who is well versed and experienced in this area of practice.

Entire process flow envisaged in the Cheque Truncating System (CTS)

The CTS project envisages a safe, secured, faster and effective system for clearing of the cheques. In the CTS the presenting bank will capture the data & images of the cheques using their Capture System which is internal to them. They have to meet the specifications and standards prescribed for data and images. To ensure security, safety and non-repudiation the PKI (Public Key Infrastructure) is being implemented across the system. The banks will send the captured images and data to the central clearing house for onward transmission to the payee/drawee banks. For that purpose RBI will be providing the banks software called the Clearing House Interface (CHI) that will enable them to connect and transmit data in a secure way and with non-repudiation to the Clearing House (CH). The Clearing House will process the data and arrive at the settlement figure for the banks and send the required data to payee/drawee banks for processing at their end. The drawee/payee banks will use the same CHI mentioned earlier for receiving the data and images from the Clearing House. It will be the responsibility of the drawee bank Capture System to process the inward data and images and generate the return file for unpaid instruments.