Paper Title : “Cheque” in Payment System

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PAPER TITLE : “CHEQUE” IN PAYMENT SYSTEM

INTRODUCTORY BACKGROUND:

Payment system could generally be described as the combination of various means, mode, materials and methodologies adopted in the settlement of debts, off-setting of due financial obligations, and effecting the transferring of funds from one person/place to the other either directly between the principal parties involved in the transaction or through approved economic agents and financial intermediaries. Both from the ancient world even to the present modern age, the advancement in civilization, developments in hi-technology and rapid response to consumer-centric preferences had made the subject of Payment Systems to have undergone different phases, which indeed, would be of utmost importance to us as practitioners in the financial sector.

It would be necessary to recall the days when trade-by-barter was the only means of effecting payment for goods and services that were bought and sold. In fact, after the discoveries of the use of cowries, the insatiable search for better materials to be used in the settlement of debt became intense. And eventually the birth of cash – i.e coin and paper money - came on board, perhaps, presumably to offer panacea to the problems associated with the previous means and mode of settling financial indebtedness and obligation.

Nevertheless, it is also worthy of note to understand that in this period of using currencies/cash to settle financial obligations, hi-technological developments have begun to play significant impact on the way we make payments. Increasingly, especially as a result of consumer-centric preferences, the adoption of some technology-driven modes of payments – including but not limited to - wire transfer (internet payments), Direct debits/credits, standing orders, mobile phones, Plastic cards (Credit/Debit/Visa cards), Electronic bill payment, POS/ATM, etc, are in serious use while effecting the transfer of funds and settling indebtedness and obligations.

Therefore, within the purview of this discourse, our focus shall be centered on the role that a few of financial instruments (otherwise known as Quasi/Near- money) plays in payment system. These financial instruments include: Cheques, Bill of payment and Promissory Notes, among others.

CHEQUE: A cheque (spelled check in American English) is a negotiable instrument instructing a financial institution to pay a specific amount of a specific currency from a specified demand/current account held in the maker/depositor's name with that institution. Both the maker and payee may be natural persons or legal entities. In other words, Cheques are written orders from account holders instructing their banks to pay specified sums of money to named beneficiaries. They are not legal tender but are legal documents and their use is governed by the Bills of Exchange Act 1882, and the Cheques Acts of 1957 and 1992.

Although cheques are regulated in most countries as negotiable instruments, in many countries they are not actually negotiable, viz., the payee cannot endorse the cheque in favour of a third party. Payers could usually designate a cheque as being payable to a named payee only by "crossing" the cheque, thereby designating it as account payee only. Note that in an effort to combat financial crime, many countries have provided, by a combination of law and regulation, that all cheques should be treated as crossed, or account payee only, and are not negotiable.

HISTORY OF CHEQUE

The usage of cheque had its origins in the ancient banking system, in which bankers would issue orders at the request of their customers, to pay money to identified payees. Such an order was referred to as a bill of exchange. The use of bills of exchange facilitated trade by eliminating the need for merchants to carry large quantities of currency (e.g. gold) to purchase goods and services. The ancient Romans are believed to have used an early form of cheque.

PARTS OF A CHEQUE

Cheques generally contain:

1. place of issue – Bank’s name and/or address 2. cheque and/or control number(s) 3. date of issue 4. payee 5. amount of currency – in words and figure 6. signature of the drawer 7. routing / account number in MICR format -

A cheque is generally valid “indefinitely” and literarily for six months (in Nigeria) after the date of issue unless otherwise indicated; this varies depending on where the cheque is drawn. In Australia, for example, it is

fifteen months. Also, in Nigeria, Legal amount (amount in words) is not just highly recommended but strictly required when writing a cheque.

GENERAL TYPES, FORMS AND CLASSES OF CHEQUES

• An order cheque – the most common form of a cheque – is payable only to the named payee (or his or her endorsee, theoretically speaking) as it usually contains the language "Pay to the order of (name)." • A bearer cheque is payable to anyone who is in possession of the document: this would be the case if the cheque does not state a payee, or is payable to "bearer" or to "cash" or "to the order of cash", etc. • A counter cheque is a bank cheque given to customers who have run out of cheques or whose cheques are not yet available. It is often left blank, and is used for purposes of withdrawal. In Nigeria, the use of counter cheque (as directed by the CBN) is restrictively to be issued under certain extreme circumstances. Hence, counter cheque may not be issued on account with incomplete documentation.

However, in view of reckless charges being taken by some banks on ‘counter cheque issuances’ coupled with customer’s complaints, the Central Bank of Nigeria (CBN) frowns at the undue issuance of counter cheque by banks in Nigeria. Also, another reason why the usage of counter cheque is not so prevalent nowadays (in Nigeria) is because of customers’ preference for the use of ATM cards to carry out their withdrawals, except in situations where large amount is involved in the withdrawals. This is in consideration of the “charges” that the bank takes on counter cheque (average of N250.00) in juxtaposition to the charges per an ATM transaction (N100,00).

• Open cheque – This is a cheque that is written and uncrossed, which is meant for encashment across the counter. • Cross cheque – As preferable by Most people, the issuance of "cross" cheques provides some levels of security. A Cross cheque has two parallel lines drawn across the face of the cheque, meaning that the cheque could not be paid across the counter. Such cheques should be paid into an account before value could be obtained on them. This is otherwise known as General crossing as opposed to Special crossing. • Specially Crossed cheques – Any cross cheque that is written with the words "not negotiable",” “A/c payee only” or a combination of both words, (or it could also carries the bank’s/branch’s address of the payee of account domiciliation along with either of the words - "not negotiable" or “account payee only”) between the two parallel lines across its face portrays a higher level of crossing with stringent import of implications.. This is a good idea, as it tends to reduce the incidences of frauds and provide good audit trail; because it tells the bank that the

cheque should not be paid on demand, and must instead be paid into the account of the payee. This means the cheque will go through the clearing system and find its way to the payee's account accordingly.

However, if the cheque is not crossed it is considered a legal "negotiable instrument" i.e. almost like cash, the amount named on the cheque can ordinarily be transferred on delivery to the bank, subject to the laws of the country under review.

• A payroll warrant refers to certain types of cheques drawn on a government agency and departments its Employees (like Military or civilian Pensioners, etc), especially on payroll matters of transactions. A conventional cheque differs from a typical warrant in that the warrant is not necessarily payable on demand and may not be negotiable. Deposited warrants are routed to a collecting bank which processes them as collection items like maturing treasury bills and presents the warrants to the government entity's Treasury Department for payment each business day. Also, Warrants may be in the Form of Return money warrant or Dividend warrant, etc. They look like cheques and clear through the banking system like cheques, but are not drawn against cleared funds in a demand deposit account. Instead they are drawn against "available funds" so that the issuer can collect interest on the float.

• A cheque sold by a post office or merchant such as a grocery for payment by a third party for a customer is referred to as a money order or postal order. • A bank draft – is a cheque issued by a bank on its own account for a customer for payment to a third party. This is also called a cashier's cheque, a treasurer's cheque, a teller’s cheque, or a bank cheque. A cheque issued by a bank but drawn on an account with another bank is a teller's cheque. A cashier's cheque is a cheque guaranteed by a bank. They are usually treated as cash since most banks clear them instantly. Conventionally, such type of cheque could not be dishonoured.

That is, Bankers' drafts are cheques drawn directly on the account of a bank rather than the account of a customer. The comfort they provide is that it is highly unlikely they would be returned unpaid due to lack of funds. However it is important to note that there is no guarantee against fraudulent use, for example, they may be lost or stolen and then used fraudulently.

A banker's draft is a cheque issued against the funds of a financial institution rather than an individual account holder, thereby decreasing

the likelihood the cheque will bounce. The funds behind a banker's draft are paid when the draft is first drawn and are held by the issuing bank until the draft is cashed. Thus the funds of a banker's draft has been allocated and verified before the document is issued, providing a guarantee it will not be dishonoured.

Before now, we used to have both Manager’s cheque and Bank draft differently issued in some banks in Nigeria. Nowadays, most bank’s have collapsed the two forms of “bank’s own instrument” into one. However, for a few banks that still maintain the issuance of the two instruments distinctively there is usually a thin line of difference between them. Whereas in the case of Manager’s cheque, the liquidation of the instrument must of necessity be done at the branch of origination; however, bank draft’s liquidation could be done at any branch without the instrument being physically being returned to the branch of issuance.

• Certified cheque - When a certified cheque is drawn, the bank operating the account verifies there are currently sufficient funds in the drawer's account to honour the cheque. That is, a certified cheque is a form of cheque for which the bank verifies that sufficient funds exist in the account to cover the cheque, and so certifies, at the time the cheque is written. Those funds are then set aside in the bank's internal account until the cheque is cashed or returned by the payee. Thus, a certified check cannot "bounce". Theoretically, a hole is punched through the MICR numbers so the certified cheque will not be processed as an ordinary cheque when it is deposited, and a bank official signs the cheque face to indicate it is certified. Although the face of the cheque is crowded, the back of the cheque is blank and the cheque can be deposited and routed through the banking system like an ordinary cheque.

While certified cheques guarantee there are sufficient funds to honour them at the time the cheque is drawn, they cannot guarantee there will be sufficient funds when the cheque is finally cleared for payment.

• A traveler's cheque is a preprinted, fixed‐amount cheque designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege. Traveler’s cheques can usually be replaced if lost or stolen, they are often used by people on vacation instead of cash. The use of credit or debit cards has, however, begun to replace the traveller's cheque as the standard for vacation money, with an increase in usage by spenders due to ease of use, and an increase of businesses preferring transfers of this kind over traveler’s cheques. This has

resulted in some businesses to no longer accepting traveler’s cheques as currency. Therefore, in many parts of the world nowadays the use of Traveller’s cheque is no longer acceptable.

Although the use of Traveler’s cheque is not acceptable in some parts of the world, however for the purpose of this discourse, our knowledge of this shall be limited to academic exercise only. Note that Traveler's cheques are available in several currencies such as U.S. dollars, Canadian dollars, pounds sterling, Japanese yen, and euro; denominations usually being 20, 50, or 100 of whatever currency, and are usually sold in pads of five or ten cheques, e.g., 5 x €20 for €100. Traveler's cheques do not expire so unused cheques can be kept by the purchaser to spend at any time in the future. The purchaser of a supply of traveler's cheques effectively gives an interest‐free loan to the issuer, which is why it is common for banks to sell them "commission free" to their customers. The commission, where it is charged, is usually 1‐2% of the total face value sold.

Historically, American Express was the company first to develop a large‐scale traveler’s cheque system in 1891, and is still the largest issuer of traveler's cheques today by volume.

American Express's introduction of traveler's cheques is traditionally attributed to employee Marcellus Flemming Berry, after company president J.C. Fargo had problems in smaller European cities obtaining funds with a letter of credit. However, traveler's cheques were first issued on 1 January 1772 by the London Credit Exchange Company for use in ninety European cities, and in 1874 Thomas Cook was issuing 'circular notes' that operated in the manner of traveler's cheques.

Several travelers cheques have been created, yet the most accepted travellers cheques are: American Express and Thomas Cook

Legal terms for the parties to a traveler's cheque are the obligor or issuer ‐ the organization that produces it; the agent ‐ the bank or other place that sells it; the purchaser ‐ the natural person who buys it, and the payee ‐ the entity to whom the purchaser writes the cheque for goods and/or services. Hence, for purposes of clearance, the obligor is both maker and drawee.

A sample of a traveler’s cheque is shown below:

Use and acceptance ‐ Upon obtaining custody of a purchased supply of traveler's cheques, the purchaser should immediately write his or her signature once upon each cheque, usually on the cheque's upper portion. The purchaser will also have received a receipt and some other documentation that should be kept in a safe place other than where he or she carries the cheques.

When wanting to cash a traveler's cheque while making a purchase, the purchaser should, in the presence of the payee, date and countersign the cheque in the indicated space, usually on the cheque's lower portion (if at a restaurant, it may be helpful to ask the waiter to watch and wait for this to be done).

Applicable change for a purchase transaction should be given in local currency as if the cheques were banknotes.

There are some security concerns associated with the issuance and operations of traveler’s cheques. Generally, it is a reasonable security procedure for the payee to ask to inspect the purchaser's picture ID. In this respect, a driving licence or International passport should suffice, and doing so would most usefully be towards the end of comparing the purchaser's signature on the ID with those on the cheque. Therefore, the best first step, however, that can be taken by any payee who has concerns about the validity of any traveler's cheque, is to contact the issuer directly.

Depositing and settlement of traveler’s cheque ‐ A payee receiving a traveler's cheque should follow its normal procedures for depositing cheques into its bank account: usually, endorsement by stamp or signature and listing of the cheque and its amount on the deposit slip. The bank account will be credited with the amount of the cheque as with any other negotiable item submitted for clearance.

Loss or theft of traveler’s cheque ‐ Loss or theft of traveler's cheques should be reported immediately to the issuer and to the local police authority. The receipt issued when the cheques were purchased will expedite the refund process.

CHARACTERISTICS OF CHEQUES

Cheques in Nigeria generally feature the name of the issuing bank in a prominent location, usually the upper left-hand corner of the cheque. As opposed to other countries, like Ghana, the address of the bank’s branch where the drawer’s account is domiciled is indicted on the cheque. In addition, they are generally produced with enhanced security features, including: background replication of bank name, watermarks, security thread, color-shifting ink, ‘holograph’ imprints, and special bond paper. These are ordinarily designed to decrease the vulnerability to counterfeit items. The payee's name, the written and amount to be tendered, and other tracking information (such as the branch of issue), are printed on the front of the check. Stamp duty – This makes the instrument to be admissible in the law court. The MICR code – This represents Magnetic Ink Character Recognition. In the case of bank draft, the cheque is generally signed by one or two bank signatories or officers; however, some banks issue cashier's cheques featuring a facsimile signature of the bank's chief executive officer or other senior official.

PARTIES TO A CHEQUE

Parties to regular cheques generally include the followings:

¾ A maker or drawer - the depositor writing a cheque. The drawer drafts or draws a cheque, which is also called cutting a cheque, especially as is being used in the United States. ¾ A drawee - the financial institution where the cheque can be presented for payment; ¾ A payee - the entity to whom the maker issues the cheque. i.e The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "payee”. ¾ An Endorsee - Ultimately, there is also at least one endorsee which would typically be the financial institution servicing the payee's account, – For example, when a drawer of a cheque addresses the instrument to a financial institution who in turn is authorized to act for a defined

purpose, (as in for e.g draft issuance, etc) or in some circumstances may be a third party to whom the payee owes or wishes to give money. ¾ An Endorser – The payee that endorses or transfers his “benefit in title” to another third party. .

PRESENTATION AND PROCESSING OF A CHEQUE

A payee that accepts a cheque will typically either present it for cash payment across the counter, or deposit it in an account at the payee's bank, and have the bank process the cheque. If the cheque is opened for encashment, the payee will take the cheque to a branch of the drawee bank, and cash the cheque there. However, when a cheque is received for processing, the following should be observed:

9 The cheque must be run under ‘cheque verifying’ machine or what is generally referred to as ‘mercury light’ – to determine its genuineness or falsehood. 9 All the components of Drawer’s “mandate rules” should be observed, including – signing rule, confirmation requirement, pattern of writing, ball pen colour, use of company seal, signing with/out date, etc. 9 Pay special attention to an account that is always with cross cheque which ‘suddenly’ has a cheque that is opened for cash. 9 Signature verification should be ensured. 9 The agreement between the amount in figure and words should be ensured. Note the rules that applies Where amount is stated differently in figures and words.- If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid. 9 The Date on the cheque must neither be stale nor pos-dated. 9 The identity of the payee should first be ascertained. 9 The standard means of identification should be taken and documented. 9 Third party payee withdrawals of value equal to and above N50,000.00 should be filmdexed. 9 The appropriate posting menu should be used in the syetem. This includes: Customer Induced and Bank induced.

However, when a cheque is deposited into an account for processing, the following additional rules should be observed:

The appropriate clearing days should be ascertained and inputted correctly in the system. Such cheques could either be referred to as local cheque or upcountry cheques All clearing cheques should be stamped with appropriate bank’s processing / clearing stamps in line with laid down procedures. That is,

once a cheque is approved and all appropriate accounts involved have been credited, the cheque is stamped with some kind of cancellation mark, such as a "paid" stamp. The cheque is now a cancelled cheque. Caution notices should be prepared for all outgoing clearing cheques with the value of N100,000. Special Cautions are also required in some instances as the case may be. If a cheque is refused at the drawee bank (or the drawee bank returns the cheque to the bank that it was deposited at) because there are insufficient funds, or the instrument is stale/post-dated, or needs confirmation/verification, etc, thereby preventing the cheque from being cleared, it is said that the cheque has bounced. For such cheques, appropriate notations should be used – DAR, DCR, etc. A cheque may thus bounce some time after it has been deposited. Note that “value” must be given to clearing cheques on or before the due day. However, in some instances, previously-given value to a cheque earlier deposited into an account could be withdrawn - if it was late uncovered that such instrument is suspected to be fraudulent.

Further, it is possible for a customer to draw against the value of ‘cheques in clearing’. This is known as drawing against unleared effect. This means that the depositor’s account is allowed access to the fund (i.e draw in part or whole sum of the value of the cheque) before the due date of the instrument. This is a special level of service to identified or needing customers. Note that before this service could be executed, the following requirements should be complied with:

4 There must be an application by the customer, in line with account’s mandate. 4 Due confirmation of instrument, as applicable – eg. Draft. 4 Customer’s acceptance of all the terms and conditions of the service must be obtained – viz: Concurrence to applicable charge, Acceptance to refund drawn fund if cheque is returned unpaid, etc. 4 Management approval must be in place. 4 Approved charges must be taken on the transaction.

Bank Liability & Customer’s Compensation In mistakes Arising From Improper Cheque processing.

Note that if the bank does not follow customer’s instructions as identified on the cheque and in line with account mandate, this would be considered a breach of the contract between the bank and the customer. In the event of litigation, the customer may be able to recover damages or compensation – as the case may be.

However, a bank may be subject to some liability which may arise from honouring a cheque subsequent to the occurrence of the following instances or circumstances:

¾ Stop payment order ¾ Account frozen by order of court ¾ Cheque drawn not in accordance with account mandate. ¾ Knowledge of dispute among account signatories. ¾ Knowledge of a death of an account signatory. ¾ Where a cheque is duly processed (on say third party payment) but the audit trail of the means of ID is lost or not taken, at litigation, the bank may incur some liability.

Therefore, the banks (both collecting and paying) in any of the above instances may have defenses to a legal action, so it would be important to quickly intimate relevant bank’s authority for guidance, especially when the bank’s reputation is on the line. This therefore, underscores the importance of paying “utmost attention” to all the relevant details associated with any instrument before and during processing.

General Tips In Handling Cheque Processing

1. Do the preliminaries – viz: Check that the cheque has the correct date, figures match the writing, signature is okay (i.e S.V the signature), Verify that the company issuing the cheque confirms it's validity, etc. 2. Ensure the cheque is passed through the eye of mercury light to ‘spot-check’ the security features. 3. Cheque issuance - where disbursements are made by cheque, be wary of cheques not issued in sequence; 4. Bearer cheque – All bearer cheques should be handled with extreme care. However, most banks do not subscribe to the issuance of bearer cheques, and are therefore not comfortable processing them. The use of such words as : pay bearer, pay cash, etc are discouraged, and are generally not allowed. 5. Salary payment cheques are to be accompanied by supporting payment vouchers when presented for processing (at the bank) by an authorised cheque signatory. The vouchers are to be appropriately completed to enable bank officials to carry out their responsibilities. All supportive salary schedules must be time-stamped, signed and dated by Bank’s officials. 6. Salary schedules or vouchers are to be initialled and dated by persons signing the cheques.

7. Credits into an Account via cheque - all signed cheques are to be accompanied by a remittance/credit advice when issued. 8. Under no circumstances are cheques to be signed blank and presented for payment. 9. All return cheques should be promptly returned to the drawer, to avoid being accused of cheque suppression. Cheque suppression is regarded as serious offence which may lead to the exit of the concerned employee. The bank also may be accused of “contributory negligence” if a cheque with a defect/irregularity is not timely returned to the drawer. 10. Check all alterations and cancellations that they are signed off. 11. All cheque holders are advised to keep your chequebook in a safe place, report any missing cheques to the bank immediately. 12. Keep cheque stock in a secure location - eg. CSU and FTL 13. Unused/Retrieved cheques from closed accounts should immediately be destroyed/invalidated/perforated. 14. Prompt/daily stock of chequebook account reconciliation – Timely reconcile the physical stock of chequebook in custody with related register records of uncollected chequebook outstanding. Discrepancies should immediately investigated and resolved. 15. Order only one set of cheques per account. 16. Don’t be “too familiar” with any account to the extent that you signature-verify the cheque without making any recourse to the Signature system or platform.

Frauds Associated with Cheque: In the broadest sense, a fraud is a deception made for personal gain. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and is also a civil law violation. Defrauding people of money is presumably the most common type of fraud, although there are many other types of frauds that are specifically related to cheque issuance, payment and processing. Therefore, Cheque fraud still poses a serious risk to the business community, financial institutions and individuals alike. It can result in loss of funds from accounts or loss of goods. Cheque fraud is among the oldest and most common forms of financial crime. Even with the advent of electronic payment products, cheques still account for billions of payments each year, making them a prime target for criminals.

¾ Fraud (identity theft) via cheques Identity fraud is the stealing of personal information and then using it illegally for fraudster’s personal advantage. Since cheques include significant personal information (name, account number, signature and in some countries driver's license number, the address and/or phone number of the account holder), they can be used for fraud, specifically identity theft .

¾ Dud cheque: Dishonour of cheque for insufficiency, etc., of funds in the accounts. This type of fraud is regarded as a crime that is enforceable at the court. Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank 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, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for ["a term which may extend to two year"], or with fine which may extend to twice the amount of the cheque, or with both.

¾ Cheque ‘kitting’ or Cheque floating: This type of fraud occurs when making Payment with a cheque and making a deposit before it clears the maker's bank and is generally illegal in many countries of the world, including Nigeria. Legally, this type of fraud is rarely enforced unless the maker uses multiple chequing accounts with multiple institutions to increase the delay or to steal the funds.

¾ Counterfeit cheque ‐ cheques not written or authorized by legitimate account holder, which is essentially forged.

¾ Altered cheques ‐ an instrument that has been properly issued by the account holder but has been intercepted and the payee and/or the amount of the item have been altered. ¾ Cloned cheque: This is a situation where an original cheque is properly drawn and issue to a third party, and at the same time, a “parallel” or prototype of the cheque is produced (having same features like Amount, A/c name, signature, etc; but which may differ in terms of Payee’s name, Date, texture & originality, etc) and run concurrently in a bid to “fake” the original. Note that while “original” instrument may be deposit through clearing, the “fake” cheque will ordinarily be presented across the counter for encashment. Also, the timing of lodgment of both instruments is worthy of note. Usually, the ‘fake’ (i.e prototype) instruments will be presented, mostly across the network branch, first before the arrival of the original cheque from clearing.

¾ Cheque substitution.

¾ Cheque Conversion

Dishonouring of Cheques

A dishonoured cheque cannot be redeemed for its value and is worthless; they are also known as an RDI (returned deposit item) cheque. Cheques are usually dishonoured on various premises, including but not limited to:

9 Insufficient fund – i.e. issuance of ‘dud cheque’. 9 Account frozen or dormant 9 The instrument being stale or postdated. 9 Placement of written “stop payment order” on the instrument. 9 Discrepancy between the amount in words and figure. 9 “Signing rule” on account mandate not religiously followed. 9 Non-adherence to “confirmation requirement” on the instrument. 9 ETC.

Note that Banks will typically charge customers for issuing a dishonoured cheque, and this charge must be in line with approved Tariff of the bank. However, as configured in FINACLE , the system had been structured to recognize the following charges on returned outward cheque:

1. A minimum charge of=N=1,500 for corporate current account and =N=500 for individual current accounts; subject to a maximum of =N=5,000 2. COT on the face value of the returned cheque. 3. VAT on the COT charged.

However, in order to avoid customers being double charged due to wrong posting carried out on return outward instruments the Fiancle menu to be used is Inward Clearing Transactions Maintenance (ICTM). Note that when ICTM menu is used, both the VAT and COT charges are automatically generated by the system, especially during month end run – whether the cheque is paid or not provided the menu option ICTM is used.

Remember that although cheques are regulated in most countries as negotiable instruments, nonetheless, in many countries they are not actually negotiable, i.e., the payee cannot endorse the cheque in favour of a third party. Payers could usually designate a cheque as being payable to a named payee only by "crossing" the cheque, thereby designating it as account payee only, but in an effort to combat financial crime, many countries have provided by a combination of law and regulation that all cheques should be treated as crossed, or account payee only, and are not negotiable.

WHAT IS MICR CODE ON A CHEQUE LEAFLET?

The acronym MICR stands for Magnetic Ink Character Recognition. This technology uses magnetically chargeable ink or toner to print the numbers and special characters on the bottom of checks or other financial transaction documents. Magnetic Ink Character Recognition (MICR), as defined by the American National Standards Institute (ANSI), is the common machine language specification for the paper-based payment transfer system. It consists of magnetic ink printed characters of a special design which can be recognized by high speed magnetic recognition equipment. This series of readable characters provides the receiving party with information needed for processing the check including: check number, bank routing number, checking account number and in some cases the amount of the check.

The numbers usually include the account number from which the money will be drawn, the identification number and the routing and transit of the cheque for the bank where the account resides. MICR technology is used in the banking industry in many countries because it allows for fast and reliable document processing.

In addition to their unique fonts, MICR characters are printed with a magnetic ink or toner, usually containing iron oxide. Magnetic printing is used so that the characters can be reliably read into a system, even when they have been overprinted with other marks such as cancellation stamps. The characters are first magnetized in the plane of the paper with a North pole on the right of each MICR character. Then they are usually read with a MICR read head which is a device similar in nature to the playback head in an audio tape recorder, and the letterforms' bulbous shapes ensure that each letter produces a unique waveform for the character recognition system to provide a reliable character result.

HISTORY OF MICR:

In the 1950s, the demand for data processing created a need for a mechanized method of cheque processing. United States banks, bankers, machine manufacturers, and check processors formed committees to create a solution. The ultimate result of these committees was the adoption of the E- 13B Magnetic Ink Character Recognition (MICR) in 1958 by the American Bankers Association (ABA). Therefore, the E-13B font was developed and accepted as the standard by the ABA in 1958. E-13B is used mainly in the USA, Canada, Australia, and Columbia, Nigeria, as well as Europe, Central America, and Far East countries.

The E-13B system uses specially shaped characters, which are printed on the bottom of bank documents. Much of the E-13B information was accepted by the American National Standards Institute (ANSI) and incorporated into several specifications for MICR printing.

Today these specifications are made available by ANSI, which defines, in detail, the formation of the E-13B characters, MICR line placements and components of the line, as well as other components of a bank cheque. Some countries have adopted the CMC-7 font providing MICR readability to their banking systems.

E-13B: CMC-7: United States of America France Canada Spain Australia Israel United Kingdom Other Mediterranean Countries Japan South America (except Colombia) India Mexico Colombia Turkey Nigeria

HOW MICR WORKS:

The E13-B information needed by clearing houses and banks is printed in a magnetic ink near the bottom of the document. After printing, the documents are then processed mechanically and electronically through a reader-sorter machine. This machine magnetically reads pertinent information about the check including the amount of the cheque, account number, institution upon which the cheque was drawn and other miscellaneous transaction codes. This information is used by the reader sorter machine enabling an electronic sort of the checks for routing purposes.

The E-13B characters are read several times, at extremely high speeds; therefore, for MICR to work successfully, the characters must be accurately printed on a document according to precise specifications and must be able to withstand the abrasive reader-sorter process.

MICR (Magnetic Ink Character Recognition) is required to print with magnetic ink, which enables bank to recognize the data through magnetic recognition

(just as the way how your credit card is recognized). OCR-A and OCR-B data are inputted through optical recognition.

Therefore, Magnetic Ink Character Recognition is a character recognition system that uses special ink and characters. When a document that contains this ink needs to be read, it passes through a machine, which magnetizes the ink and then translates the magnetic information into characters.

MICR technology is used by banks. Numbers and characters found on the bottom of checks (usually containing the check number, sort number, and account number) are printed using Magnetic Ink. To print Magnetic Ink need, you need a laser printer that accepts MICR toner.

MICR provides a secure, high-speed method of scanning and processing information.

Finally, the sequence of OBIP MICR numbering system is as follows: Cheque number, Bank’s Identification code, Account Number code, Miscellaneous Transaction code, and MICR sorted Amount.

I hope the above dissertation has provided some searchlight insights on the subject matter thereby presumably enhancing your knowledge-base faculty.

Thank you for listening.

Chris. T. Akenroye January 2008

N.B: This paper was presented to a group of staff of a Bank’s branch at Kaduna in January 2008 during the bank’s Knowledge Sharing Session (KSS).