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### CLEARING CHEQUES - RISKS AND SCAMS SHOULDN'T BANK FIX THE CHEQUES CLEARING LOOPHOLE THAT SO MANY SCAMMERS ABUSE?

CLEARING CHEQUES - RISKS AND SCAMS SHOULDN'T BANK FIX THE CHEQUES CLEARING LOOPHOLE THAT SO MANY SCAMMERS ABUSE?

By : M.S.Yatnatti Editor and Video Journalist Bengaluru : The clearing system : Cheques are paper items which are physically transferred between banks at the same time as the electronic data is processed. Although the paying bank receives some of the data electronically, the physical cheques themselves must also be transferred so that they can be examined by the paying bank for security and fraud prevention purposes. Day 1:When a cheque is paid into an account (at the collecting bank) it is sent to the bank's clearing centre at the end of the working day. Day 2:All cheques received are sorted at the clearing centre and the sort code, account number and serial number on the bottom of the cheque, together with the amount of the cheque, are sent electronically to the banks on which they are drawn (the paying bank) by 11am. The physical cheque is then sent to the bank on which it is drawn.Day 3:The paying bank debits the payer's bank account with the amount of the cheque on the morning of day 3. At the same time, all banks calculate the amount they must pay each other on the basis of the value of all the cheques exchanged on the previous day. The net balances are then settled across accounts held at the RBI .This is the end of the central clearing cycle. However, if the paying bank was unable to pay the cheque, for instance if the cheque owner has insufficient funds in their account, placed a stop on the cheque, or filled it out incorrectly, it would return the cheque to the original collecting bank on day 3, or in certain specific circumstances, by 12 noon on day 4. Cheques are generally returned by first class post, so the earliest the collecting bank will know that the cheque will not be paid is day 4, or possibly day 5. When you deposit a check and it "clears,” that's a good thing - but what does that really mean? Can a check bounce or be cancelled after it clears? Processing checks is a confusing process, and scammers take advantage of that confusion. The results can be a costly lesson in the risks of accepting checks.It's essential to know that a check can bounce after you deposit it - even if your bank allows you to withdraw cash from that deposit. The process of clearing checks involves moving money from the check writer's account to your account. To do this, you deposit the check, your bank asks the check writer's bank for money, that bank takes money from the check writer's account, and they send it over.Once this process is complete, it is generally (but not always) safe to spend the money.

Did it Really Clear? Unfortunately, the term "clear” sometimes gets used prematurely. An item has really only cleared after your bank has received funds from the check writer's bank. But bank employees might tell you that a check has cleared, and your bank's computer systems might show that you have those funds available for withdrawal.Mixed terminology: in many cases, when somebody tells you an item cleared, they're saying that you can use the money. You can spend that money with your debit card, you can withdraw cash at an ATM, or you can set up a payment through online bill pay.Most of the time, this informal terminology is fine - If the check doesn't bounce, and you can spend freely.Funds available: most of the confusion around checks comes from bank policies and laws that allow you to spend money before a check really clears. But that just means you can use the money - it doesn't mean the check has cleared (or that the funds have arrived from the check writer's bank).What if you Spend the Money?If you deposit a check, withdraw or spend the money, and the check bounces, you've got problems. The bank will reverse the deposit to your account. If you have money in the account, your account balance will drop - if not, you'll have a negative account balance and you'll start bouncing other payments and racking up fees.Ultimately, you are responsible for deposits you make to your account, and you're the one at risk. You are protected from certain types of errors and fraud, but that protection does not cover bad checks that you deposit..There are a few ways to avoid getting ripped-off (or having to pay for somebody else's honest mistake). First, the longer you wait to spend the money, the better your chances.

Slashdot reported a recent story about a guy who lost his lawsuit against a bank, over a variation on a classic Nigerian email scam. The scam is one we've discussed many times in the past: somehow the victim gets a big check, which they're expected to deposit in a bank. After the check "clears," the victim/recipient is supposed to transfer a large chunk of that money to the scammer, on the belief that they get to keep whatever is left over. What really happens is a few days after the check "clears," the bank finds out it's fraudulent, and tries to void the transaction. But, by then, the victim has already transferred out a big chunk of money (and the scammer has already taken all that cash out of the bank and disappeared) -- leaving the victim footing the bill, with the bank expecting them to come up with the missing cash. In this case, the scam took on all the familiar facets of this scam: .In March 2009, Brian Peters received an email from someone purporting to be a citizen of Malaysia. The e-mail informed Peters that certain third parties in the United States and Canada owed the purported Malaysian money, but that "they can not transfer the funds to any bank account outside America continent due to their new company policy [sic]." He asked Peters to "assist me in receiving the funds and forward to me." He offered to pay Peters 12 percent of the money. Peters agreed after apparently negotiating an increase of his fee to 15 percent. Peters deposited the $808,988.90 in checks received from the purported Malaysian at Chino Commercial Bank. After the bank notified Peters that the checks had cleared, Peters wire transferred$468,000 to Hong Kong. Shortly thereafter, the checks were dishonored after the bank detected that they had been altered. Since Peters was personally liable for any overdrafts on the account, which had only a few thousand dollars, the bank sought to attach property owned by Peters to collect on the overdraft. The trial court granted the banks motion to attach against Peters in the amount of \$458,782.60. This certainly isn't the first such lawsuit ,a similar case t was reported years ago, which involved some scammers tricking a law firm (who really should have known better). The reason this scam works over and over and over again is pretty simple: most people have no idea that when a check "clears," it's not actually been validated. This is apparently due to various laws that require banks to make money from checks available within a very short period of time. So the way banks deal with this is to just make the money available, and if they later find out that the check was fraudulent, they pull back the money. But, of course, most people don't know this and assume (somewhat reasonably) that if a check "clears" and the money is listed as "available," the bank has made sure the check is legitimate. This is a somewhat unintended consequence of laws to make paying by check work better, but it leads to a huge opening for these types of scams.So if they need to do that, shouldn't it make sense for banks to at least put forth pretty clear warnings on money that has not really been validated yet? Or to at least proactively warn anyone seeking to withdraw money that hasn't really been validated that if the check fails to validate, they may be liable? It seems like there must be better ways to deal with this kind of scam than to just let the scammers keep taking advantage of this knowledge gap.

Reportedly In India, the clearing system is local and confined to a defined jurisdiction covering all the banks and branches situated in the area under a particular zone. The clearing house is a voluntary association of banks under the management of a bank where the settlement accounts are maintained. Wherever Reserve Bank of India has its office (and a banking department), the clearing house is managed by it. In the absence of an office of the Reserve Bank, the clearing house is managed by the State Bank of India, its associate banks and in a few cases by public sector banks..Keeping in view the technological progress in payment and settlement systems and the qualitative changes in operational systems and processes that have been undertaken by a number of Banks, the Reserve Bank of India had, with effect from 1st November 2004, withdrawn its earlier instructions to commercial Banks on (i) Immediate Credit of local/outstation cheques, (ii) Time Frame for Collection of Local / Outstation Instruments and (iii) Interest Payment for Delayed Collection. The withdrawal of these mandatory guidelines was expected to enable market forces of competition to come into play to improve efficiencies in collection of cheques and other instruments. This collection policy of the Bank is a reflection of our on-going efforts to provide better service to our customers and set higher standards for performance. The policy is based on principles of transparency and fairness in the treatment of customers. The Bank is committed to increased use of technology to provide quick collection services to its customers. .In India there are about 1050 cheques clearing houses. These clearing houses clear and settle transactions relating to various types of paper based instruments like cheques, drafts, payment orders, interest / dividend warrants, etc. In 40 of these clearing houses, cheque processing centers (CPCs) using MICR (Magnetic Ink Character Recognition) technology have been set up. At 14 more clearing houses, MICR cheque processing systems are proposed to be set up. The Reserve Bank has issued the Uniform Regulations and Rules for Bankers' Clearing Houses (URRBCH) which have been adopted by all the clearing houses. These regulations and rules relate to the criteria for membership / sub-membership, withdrawal / removal / suspension from membership and the procedures for conducting of clearing as well as settlement of claims between members.