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
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.
The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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