Slides developed by Les Wiletzky Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 5 th Edition by Henry R. Cheeseman Chapter 21 Checks and Digital Banking

21 - 2Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Introduction Checks Checks are the most common form of negotiable instrument used in this country 70 billion are written annually Act both as a substitute for money and as a record-keeping device They do not serve a credit function wire transfer Billions of dollars are transferred each day by wire transfer between businesses and banks

21 - 3Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Bank – Customer Relationship Creditor – Debtor Relationship Created when a customer deposits money into the bank The customer is the creditor and the bank is the debtor Creditor – Debtor Relationship Created when a customer deposits money into the bank The customer is the creditor and the bank is the debtor Principal – Agent Relationship Created if the: deposit is a check that the bank must collect for the customer or the customer writes a check against his or her account The customer is the principal and the bank is the agent Principal – Agent Relationship Created if the: deposit is a check that the bank must collect for the customer or the customer writes a check against his or her account The customer is the principal and the bank is the agent

21 - 4Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Uniform Commercial Code (UCC) Banking Provisions Article 3 (Negotiable Instruments Article 3 (Negotiable Instruments Establishes the requirements for finding a negotiable instrument Article 4 (Bank Deposits and Collections) Article 4 (Bank Deposits and Collections) Establishes the rules and principles that regulate bank deposit and collection procedures for checking accounts and check-like accounts Article 4A (Funds Transfer) Article 4A (Funds Transfer) Establishes rules that regulate the creation and collection of and liability for wire transfers

21 - 5Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Ordinary Checks Article 4 of the UCC Article 4 of the UCC – establishes the rules and principles that regulate bank deposit and collection procedures Check Check – an order by the drawer to the drawee bank to pay a specified sum of money from the drawer’s checking account to the named payee (or holder)

21 - 6Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Parties to a Check Drawer Drawer – The customer who maintains the checking account and writes (draws) checks against the account Drawee Drawee – The bank on which the check is drawn Payee Payee – The party to whom the check is written

21 - 7Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Indorsement of a Check Occurs when a payee indorses a check to another party by signing the back of the check Indorser Indorser – The payee who indorses a check to another party Indorsee Indorsee – The party to whom a check is indorsed

21 - 8Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Electronic Fund Transfer Systems Electronic fund transfer systems (EFTS) Electronic fund transfer systems (EFTS) are supported by contracts among and between customers, banks, private clearinghouses, and other third parties The most common forms of EFTS are: Automated Teller Machines Point-of-Sale Terminals Direct Deposits and Withdrawals Pay-by-Internet The most common forms of EFTS are: Automated Teller Machines Point-of-Sale Terminals Direct Deposits and Withdrawals Pay-by-Internet

21 - 9Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Special Types of Checks Bank Checks Bank Checks – Checks for which the bank is solely or primarily liable: Certified Check Cashier’s Check Traveler’s Check

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Bank Debit Cards Electronic Fund Transfer Act Regulation E Electronic Fund Transfer Act and Regulation E – regulate consumer electronic fund transfers and establish consumer rights in the following areas: Unsolicited cards Lost or stolen debit cards Evidence of transaction Bank statements

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Honoring Checks Honor honor Honor – When a drawee bank receives a properly drawn check and there are sufficient funds in the drawer’s account to pay the check, the bank must honor the check and pay it Issues related to honoring checks include: Honor honor Honor – When a drawee bank receives a properly drawn check and there are sufficient funds in the drawer’s account to pay the check, the bank must honor the check and pay it Issues related to honoring checks include: Stale Checks Incomplete Checks Death or Incompetence of a Drawer Stop-Payment Orders Overdrafts Postdated Checks Wrongful Dishonor Stale Checks Incomplete Checks Death or Incompetence of a Drawer Stop-Payment Orders Overdrafts Postdated Checks Wrongful Dishonor

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Federal Currency Reporting Law Currency Transaction Report (CTR) Federal currency reporting laws require financial institutions and other entities to file a Currency Transaction Report (CTR) with the Internal Revenue Service (IRS) for: The receipt of a single transaction or a series of related transactions of cash in an amount greater than $10,000 Suspected criminal activity by bank customers involving a financial transaction of $1,000 or more in funds

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Forged Signature of the Drawer Forged Instrument Forged Instrument – A check with a forged drawer’s signature on it forged signature The ultimate loss for the payment of a check over the forged signature of the drawer usually falls on the bank that paid the check The payor bank may recover from the forger, if he or she can be found

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Altered Checks A check that has been altered without authorization that modifies the legal obligation of a party Original Tenor Original Tenor Presentment Warranty Presentment Warranty If the payor bank pays the altered check, it can charge the drawer’s account the original tenor (amount) of the check but not the altered amount

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Collection Process (1 of 2) A bank is under duty to accept deposits into a customer’s account This includes collecting checks that are drawn on other banks and made payable or indorsed to the depositor UCC Article 4 UCC Article 4 regulates the collection process

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Collection Process (2 of 2) Payor Bank Payor Bank – The bank where the drawer has a checking account and on which the check is drawn Depository Bank Depository Bank – The bank where the payee or holder has an account Collecting Bank Collecting Bank – The depository bank and other banks in the collection process Intermediary Bank Intermediary Bank – A bank in the collection process that is not the depository or payor bank Payor Bank Payor Bank – The bank where the drawer has a checking account and on which the check is drawn Depository Bank Depository Bank – The bank where the payee or holder has an account Collecting Bank Collecting Bank – The depository bank and other banks in the collection process Intermediary Bank Intermediary Bank – A bank in the collection process that is not the depository or payor bank

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The Check Collection Process (1 of 2) DRAWERPAYEE METRO BANK CITY BANK COUNTRY BANK (Depository and collecting bank) (Intermediary and collecting bank) City Bank sends the check to Country Bank for collection (Drawee and payor bank) Drawer issues a check to Payee drawn on Country Bank Payee deposits the check in her account at Metro Bank Metro Bank sends the check to City Bank for collection Drawer has a checking account at Country Bank

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 1. The Federal Reserve System 2. Deferred Posting 3. Provisional Credits 4. Final Settlement The Check Collection Process (2 of 2)

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The “Four Legals” That Prevent Payment of a Check (1 of 2) 1.Receipt of a notice affecting the account, such as a notice of the customer’s death, adjudgment of incompetence, or bankruptcy 2.Receipt of service of a court order or other legal processes that “freezes” the customer account (e.g., a writ of garnishment)

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. The “Four Legals” That Prevent Payment of a Check (2 of 2) 3.Receipt of a stop-payment order from the drawer 4.The payor bank’s exercise of its right of setoff against the customer’s account If one of these four legals is received before the payor bank has finished its process of posting, the check cannot be paid contrary to the legal notice or action

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Failure to Examine Bank Statements in a Timely Manner The customer owes a duty to examine the statements (and canceled checks if received) promptly and with reasonable care to determine if any payment was not authorized because of alteration of a check or a forged signature The customer must promptly notify the bank of unauthorized payments

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Duty of Ordinary Care ordinary care Collecting banks are required to exercise ordinary care in presenting and sending checks for collection negligence Failure to do so constitutes negligence A collecting bank that takes proper action on a check prior to its midnight deadline is deemed to have exercised ordinary care A bank is liable only for loses caused by its own negligence

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Commercial Wire Transfers (1 of 2) UCC Article 4A – Fund Transfers UCC Article 4A – Fund Transfers governs wholesale wire transfers: Applies only to commercial electronic fund transfers Electronic Fund Transfer Act Consumer fund transfers subject to the Electronic Fund Transfer Act are not subject to Article 4A

Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. Commercial Wire Transfers (2 of 2) UCC Article 4A UCC Article 4A (continued) Governs the rights and obligations between parties to a fund transfer unless they have entered into a contrary agreement If a receiving bank mistakenly pays a greater amount to the beneficiary than ordered, the originator is liable for only the amount he or she instructed to be paid