English Banking Law Essay

INTRODUCTIONThere argon three types of run down frauds exists in UK viz. forge, counterfeit and fraudulently altered cheque fraud. In 2005, the cheque fraud in U.K was estimated about 40.3 million a 13% decrease from the 2004 total of 46.2 million. The earlier year figures also revealed a steady increase totaling 36million in 2002 and 45million in 2003.In U.K during 2005, counterfeit cheque fraud was estimated at 3.23m, speculative cheques fraud was estimated at 30.9 m in 2005 and fraudulently altered cheque fraud was estimated at 6.2 millions.SOURCE FRAUD FACTS -2006 APACS- UKThis paper studies the various protections available to banks and customers when using cheques as opposed to display panels, as method of payment.PROTECTION AVAILABLE TO CHEQUE PAYMENTS UNDER turn on OF EXCHANGE ACT, 1882, UK (BEA) AND CHEQUES ACT 1957Under Bill of Exchange Act, 1882, under section 81 A, a non-transferable cheques has been defined as follows81 A (1). Where as cheques is cover and bears across its gift the row composition payee or a/c either with or without the word entirely, the cheques shall not be transferable still shall only be valid as between the parties thereto.(2) A banker is not to be treated for the purpose of section 80 above as having been indifferent by reasons only of his failure to concern himself with any purported second gear of a cheque which under subsection (1) above or separatewise is not transferable. (Cheques Act, 1992). 1 risk associated with the cheques bearing high-risk or unauthorized second gears. that protection is available under the English Bills of exchange Act, (BEA, or the Act). Under BEA, a legitimate holder of a cheques payable to be ber attain a good title to the instrument overcoming thereby any adverse claim of possessorship that susceptibility have been hold good against his predecessor.Accordingly, the payment by the fallee bank to those acquirers discharges the cheques as well as the drawers engageme nt thereon so as to permit the drawee bank to debit the drawees broadsheet. But this is not applicable to cheques payable to order. In the case of payable to order cheques, effect of an unauthorised or an absence of endorsement or defective endorsement shall have to be looked into under the circumstances of forged endorsements.One of the ways to go on forged endorsement or spillage cod to stolen cheques is to use crossed cheques or cheques payable in account. Cheques crossing are available under the BEA, UK. The crossed cheques requires to deposit the cheques into account rather than payable to bearer does not reallocate the cheques theft losings but it minimizes the loss and thus benefits the party on whom the loss falls.Further the losses arose due to stolen cheques or loss cheques payable to bearer fall on the dispossessed owner under BEA. thus under BEA , reallocation of loss apart from dispossessed owner may not be successful in case of crossed cheques payable to bearer as the onerous shifted to bank for its neglectfulness. If a bank has exerciseed in good conviction and it is protected under BEA for the payment make to open cheques to bearer. In the case of crossed cheques, if the bank seeks protection, it should have acted without negligence and in good faith. Under BEA, if forged endorsement losses fall on the taker from the forger who is naturally a bank. Further, the cheques payable to the order under the BEA, loss reduction thus seems to be mainly advantageous to the collecting bank. Further the collecting bankers of the crossed cheques are protected under the BEA over forged endorsements as long as they acted in good faith and without negligence.Further under BEA, the drawee bank is protected and this shifts the reallocation of forged endorsement losses to the first exonerated party prior to the collecting bank. Where the one who grabbed the payment by means of a bank account was the conman, such innocent party is construed to be dispos sessed owner. indeed the crossing has re de call attentionate the loss to the dispossessed owner, thus excluding the collecting bank that took the cheque from the conman. thereforece under BEA, protection is available to banking channel had they acted in good faith and without negligence even in case of crossed cheques .If an open or crossed stolen cheque has been collected by or paid to the conman , the loss is assigned to the dispossessed owner .Under UK laws , where a cheque is payable to order is collected or paid over a forged endorsement for or to a non-bank situated in the chain of title subsequent to the conman, loss is assigned to the non-bank from that of the conman.This is apart from of whether the cheque was collected for or paid to the innocent taker from the conman or soul obtaining title from the conman despite of crossing. Where the cheque is crossed and it has to be paid into a bank account and then only it dirty dog be encashed as it leave behind be convenient for the dispossessed owner to trace that person and assign the loss to him. Thus the crossing of cheque becomes more than helpful to the true owner. However thus the innocent endorser has to bear the loss as the benefit is not in the reallocation of losses.The best example of the above is the Nigerian gangsters direct in UK and taking the gullible students who are in the poverty to carry out cheque fraud worth 50 million a year. These Nigerians conman restore poor students with promises of good cash reward for just providing the conman with their bank account particulars. By using stolen corporate cheque books, they then deposit huge union of British pounds through the accounts. No sooner the account is citeed with the collection amount from the fraudulent cheques, the account go away be emptied before the firm or bank realizes what has happened.The major lions share goes to the conman and only a very meager amount goes to the innocent, poor student who has provided the bank account material body to the conman. When the fraud comes to light due to alerting by the bank to the police, it is the poor, innocent student who will become the scapegoat. The conman mainly selects the students from Camden in North London where thousands of students from the working capitals universities congregate. Conman liberally offer them up to 5000 for doing nothing. then the conman approaches an insider who is working in the royal mail and induces them to steal a companys cheque book. Then the conman visits the company office to collect the directors signature from the dustbin and thus they scrupulously copy the same in writing the bogus cheques. Thus the conman had a fortune by sharing a lions share in the booty leaving the innocent, poor account holder to face police and possible fraud investigation.iBanks and building societys in UK from September 2006 onwards is not to accept the cheques that are issued in favour of the banks itself in a move to avoid frauds. Bank is to insist to issue the cheques payable to an individual or to include the individuals name on the payee define after the name of the institution.This strategy is mainly designed to ensure that the money lands in the right account and to bring to an end to cheque fraud which reached to a height of 46.2 million in 2004 which includes counterfeit and stolen cheques. This modification is being launched following a case in which an independent financial advisor informed his clients to draw cheques out to the financial institutions where the money was going to be invested. He then paid them in to his own account, rather than the customers account.iiUnder the BEA , there is a cookery with a bill containing words prohibiting transfer or indicating an intension that it should not be transferable and these instruments is termed as not negotiable. As such these instruments puke not be negotiated by the payee to another holder.In UK, an account payee or a/c payee and with or without the wo rds only can be encashed only by the account holder and thus it can not be encashed other wise than by an endorsement. Further, under the BEA, the consequence of an unauthorised or forged assignment is similar to that of forged endorsement as both do not convey title. Under BEA, in there is no borrowing, the drawee can not be held liable on the instrument and it does not exclude in tort or in receipt of money provided elements of such liability are present.If the drawer has given sufficient notice well in advance informing the drawee about the forged endorsement and the remedy available to the drawer against drawee for the forged endorsement is under contract and this arises regardless of any particular provision of the BEA. Further under BEA , no remedies is specified for the misappropriation under forged endorsement but the injured can avail the common law remedies for the embezzlement of property in chattels generally rather than stipulating specific recourse to the true owner o f misappropriated cheques. Further the loss of cheque does not forfeit the action on it under the BEA.Under BEA, no title is passed on under the forged endorsements and one who derives the title under forged endorsement can not enforce payments against a prior party to the forgery. Further no payment is do under due course so as to discharge the cheque and to preclude drawees liability against the drawer. Thus the original owner from whom the cheque was stolen and forged inherits the right to and on the cheque and he has a right to sue for the wrongful interference with his rights.Further under BEA, an endorser is barred from refuting the authenticity and promptness of all previous endorsements and at the time of endorsement, he had a good title and this denial will be advantageous for the holder in due course later. Further under BEA, the drawee bank can base its reliance on laws governing mistake and restitution for the payment make over a forged endorsement. Further, under BEA provisions, true owner may recover on the lost cheque from any party prior to the falsification till up to the drawer.Under BEA, cheques payable to fictitious or non existing persons is deemed to payable to the bearer. A collecting bank can not be held responsible for payment made to a thief if it is drawn on fictitious name and if they have acted in good faith which absolves the collecting from its liability. In Fok Cheong Shing Investments v. Bank of Nova Scotia, the president of the drawer who turned to be the authorised signatory of the company issued a cheque to a real person with an intention for misappropriation.The loss was allocated to the drawer under the fictious payee provision. Thus the drawee bank is being protected under the BEA if it has paid a cheque over forged endorsement in the ordinary course of business under good faith. Thus the statutory protection is extended to the collecting bank which collects in good faith and without negligence a cheque bearing a forged endorsement. S 60 of the BEA does not warrant that drawee bank should act with out negligence. However one may assume that a bank has to act without negligence in the ordinary course of business.The UK Review Committee on Banking Services Law and Practice considered provisions ss.60, 80 and s.1 of the Cheques Act 1957. The committed recommended to admit these provisions under single enactment so that statutory protection may be extended to a paying bank acting in good faith and without negligence. Both the s 82 and s.1 of the Bills of exchange (crossed cheques) Act were repealed by the Cheques Act 1957 in UK which mainly extended the protection to open cheques and other payments documents.In UK, the drawee is primarily liable to payment, the endorser is liable secondly and the drawer is the ultimately liable to payment upon dishonor. Not withstanding this, the drawer and the endorser may sign without recourse. The United Nations Convention on international Bills of exchange and In ternational Bills of Exchange and International promissory notes , 1988( UNCITRAL Convention) specifies that the drawer may exclude his own liability for acceptance or deferment by an express stipulation in the Bill. Such stipulation will hold of use only where another party is or becomes liable on the bill.PROTECTION AVAILABLE TO PAYING BANKSection 24 of the BEA states that a forged signature is no signature.In Brown v Westminster Bank (1964), the estoppel caused from the misleading facts from the client. In this case , the bank has reminded a old lady , the customer against the veracity of the signature as her signature was forged more than in 300 cheques and in turn she certified that the signature was her own. When the bank was sued by her son later, it was held that bank was not liable and they were estopped from denying the genuineness of the cheques.In Tai Cotton Mills Ltd v Liu Chong Hing bank (1985), it was held in this case that a customer of a bank needs to check his ban k statement to lapse on watch that the forged cheques were processed. The banks express condition to the contrary in the contract with customer can absolve the banks from the wrongful debit. ilk wise if a bank pays a cheque in breach of a mandate by oversight, it has the right of subrogation and the bank has the right to take the will power of a title or good that it effectively paid for.PROTECTION IN THE CASE OF CONVERSIONIt is not necessary for the bank to check every(prenominal) endorsement on the cheque and it would be time consuming and onerous to do so. So as to assuage the liability of banks, BEA (1882) and the Cheques Act (1959) offer refutation for the paying bank.Bank of Ireland v Hollicourt (Contracts) limited (2000) EWCA Cir 263.A suit was filed against a bank which continued to pay on cheques against the companys bank account even after filing of a petition for bankruptcy. It was held that the bank had acted as an agent and didnt have any beneficial interest and the legislation made the disposition void but that did not operate the way claimed.Roger Smith and Christopher Trimothy Esmond Hayward and Lloyds Bank TSB Harvey Jones Ltd and Woolwich Plc (2000).Where a cheque has been misused falsely to change the name of the payee, then the piece of paper can not be termed as a cheque and an action for alteration against the collecting or paying bank will stand only as the nominal value of the paper and not as to the face value. As the material alteration was carried out with out accede of any one but the fraudster and under the bill is avoided save against a party consenting or making to the alteration.PRECAUTIONS TO BE OBSERVED WHILE paper A CHEQUEWrite clearly the name of person in whose favour your are writing a cheque with additional information manage Dr, Er, his shop name or company name etc.From September 2006 on wards whenever you issue a cheque to UK building society or to a bank, add additional information other than the name of the ba nk or society like account no, bank branch name etc.To prevent fraudsters to add words in the empty blank space available in the written cheque, it is always better to draw a line through unused spaces.Dont pre sign blank cheques and also try to fill all the details like full name, amount in figures and words and dont issue undated cheques.Always issue account payee only crossed cheques to avoid any frauds.CREDIT CARD CHEQUESThese cheques have been issued as an additional facility on credit card accounts for the last 10 years in UK. These are similar to the normal bank account cheques and can be deployed for the same purpose. During 2004 , about 3.4m credit cheques have been issued which constitute a very little percentage (2%) as opposed to overall number of credit card in operation which totaled to 1.727 billion in the UK according to APACS , the UK payment association. The credit card cheques are likely to bounce in approximately of the cases if credit limit has been crossed. Th ese credit card cheques are utilised for high value transactions ranging from 850 as against 58 for a UK credit card purchases and cxx for payment of a personal cheque.In credit card cheques, the customer need not ask for the cheques from the credit card issuer but they are issued at the discretion of the card provider and there are different terms and conditions applicable to transaction done through credit cards cheques as compared with a credit card and this is being unaware by the most of the customers.One of the disadvantages is the fraud that is prevalent in the credit card cheques as the most of the issuer are forwarding it to their customers on discretionary basis. These credit card cheques are vulnerable to fraudulent activities as most of the customers do not aware that credit card cheques have been dispatched to them. In the case of these credit card frauds, lender has to bear the losses rather than customer.CREDIT CARD FRAUDSCredit and debit card frauds live 400 m during 2004 and devise deployed by the fraudsters have become sophisticated.One of the remedy is to insure against the ID theft. Some insurance company offer it as free adds on with home insurance policy. One of the protection for the prevention of credit card frauds is the introduction of new industry standard namely Chip and Pin which undeniable implanting a microchip inside the credit and debit card and mandates that consumers key in a secrete four-digit personal identification number to complete a transaction using the card. As the result the consumers deceived by the fraudsters are on the decrease in UK.i Dan Evans, Gangs Pounds 50m stolen cheque racket , Sunday Mirror, Jan, 12, 2003.ii Banks swan checks on Cheques in new bid to beat pounds 46 million fraud, The Birmingham post, December 8, 2005, page 24.Check Your Balance before the Match. The News Letter (Belfast, blue Ireland) 11Cheques in the Post-Mortem. The Birmingham Post (England) 21 Jan. 2006 27.Cheques to Be Stubb ed Out. After 350 YEARS Signed and Sealed. The Mirror (London, England) 10 Nov. 2004 1.Fraud Bill Shock. Evening Gazette (Middlesbrough, England) 31 Jan. 2006 2.Ghost Workers Help Fraud to Soar. Western get off (Cardiff, Wales) 2 Feb. 2005 6.King of the Cons. The Mirror (London, England) 11 Jan. 2005 10.Postman Given Asylum Plundered Pounds Sterling 20million. The Daily Mail (London, England) 21 Dec. 2005 17.Store Bans Slowcoach Cheques to Speed Checkouts. Western Mail (Cardiff, Wales) 3 Apr. 2006 4.Sally Ramage Dabydeen, Legal and Regulatory Frame work iUniverse, 2004.