CHEQUE FRAUD: DEFENCE GUIDELINES
Given the prevalence of cheque fraud in South Africa, familiarity with the guidelines for protecting oneself against the scourge is mandatory.
A cheque is a signed, written instruction given by the account holder (drawer) to the bank (drawee) to pay money from the account of the drawer to the person or company named in the cheque (payee). The payee (endorser) may negotiate the cheque to a third party (endorsee).
Cheque fraud occurs principally in three ways:
a signature may be forged onto a blank cheque or as an endorsement on the back of a cheque;
an already completed cheque may be washed and recompleted before being presented for payment; and
a cheque may be fabricated in its entirety.
Victims of cheque fraud include financial institutions, businesses that accept and issue cheques, and the consumer. In most cases cheque fraud begins with the theft of a financial document. This can occur when someone steals a blank cheque from your home, finds an old and used cheque in your bin or steals a cheque through the mail.
Before a cheque is paid by the drawer to the payee, it passes through many hands. For example, it could move from the payee to the depository bank, then to the collecting bank, then perhaps to a presenting bank, and finally to the drawee bank. Cheques may thus also be intercepted at any point between being drawn and being paid.
In essence, a cheque is a cambial contract – an ancillary agreement to give effect to the underlying relationship between two parties. A contract of sale is one example of such an underlying relationship. A cheque is a means of completing the underlying agreement.
There can be more than one cambial contract on a cheque. A cambial contract exists, for instance, between the drawer and the payee and also between the endorser and the endorsee. No cambial contract exists between the drawer and the endorsee. A drawer is liable to the endorsee on the basis of his signature and not because of an underlying contract.
A holder in due course is a bona fide (endorsee of an order cheque or payee of a bearer cheque) in possession of a cheque, which is complete and regular on the face of it, who gave value for the cheque, which cheque was negotiated to the holder in due course before it was overdue.
If the cheque had been previously dishonoured, the holder in due course must not have had notice thereof and, at the time of negotiation, he must have had no notice of a defect in the title of the person who negotiated it to him.
Liability of banks on a forged cheque
Almost invariably, the person committing the fraud manages to disappear, with the result that cheque fraud litigation involves a claim by an injured party against a bank.
Where a drawee bank pays a cheque with a forged signature, the injured party would have a claim against the drawee bank. The drawee bank’s liability for forged signatures of the drawer arises because the drawee bank maintains the drawer’s signature card on file and is therefore held responsible for verifying the signature.
Where a depository bank accepts and processes a cheque bearing a forged endorsement, the depository bank may be liable to the injured party. The depository bank’s liability for the forged endorsement of the payee arises because the depository bank has direct contact with the individual presenting the fraudulent endorsement.
It is an issue dealt with in section 58(1) of the Bills of Exchange Act, 1964 (Act 34 of 1964), which provides that if a
“bill payable to order on demand is drawn on a bank, and the bank pays the bill in good faith and in the ordinary course of business, it is not incumbent on the bank to show that the endorsement of the payee or any subsequent endorsement was made by or under the authority of the person whose endorsement it purports to be, and the bank is deemed to have paid the bill in due course, although such endorsement has been forged or made without authority: Provided such endorsement does not purport to be that of a person who is a customer of the bank at the branch on which the said bill is drawn”.
Is the drawer ever liable where his signature was forged?
A signature is necessary to create the cheque, to negotiate a cheque made to order, and to found the liability of the various parties to the cheque. Section 22 of the Bills of Exchange Act provides that a forged signature is wholly inoperative. The bank may thus not pay out a cheque with a forged signature on it. Hence the drawer is not liable on such a cheque to the payee.
Section 36(b) of the Bills of Exchange Act creates special rights for a holder in due course.
The section provides that a holder in due course “holds the bill free from any defect in the title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill”.
Title defects and personal defences are referred to as relative defences when compared to absolute defences. Forgery is an absolute defence; one meaning that a drawer will also not be liable to a holder in due course where his signature was forged.
Liability of an endorser on a cheque where the drawer’s signature was forged
Forgery may, in certain cases, not be raised as a defence. Section 53(2)(b) of the Bills of Exchange Act creates a statutory estoppel by providing that an endorser, by endorsing an instrument, is “precluded from denying to a holder in due course the genuineness and regularity in all respects of the drawer’s signature and all previous indorsements”. This means that where the drawer’s signature was forged but the endorser’s signature is valid, that the endorser will be liable to the endorsee on the cheque.
Assuming that a person steals a blank cheque, completes it and presents it to the bank for payment, that person may be guilty of the following crimes:
Theft of a cheque – unlawfully and intentionally appropriating movable, corporeal property which belongs to and is in the possession of another provided that the intention to appropriate the property includes an intention to permanently deprive the person entitled to the possession of the property, of such property;
Forgery – unlawfully and intentionally making a false document to the actual or potential prejudice of another;
Uttering a forged document – unlawfully and intentionally passing off a false document to the actual or potential prejudice of another; and
Fraud – unlawfully and intentionally making a misrepresentation which causes actual prejudice or which is potentially prejudicial to another.
The following 12 guidelines are offered as defence mechanisms against cheque fraud:
Do not send cheques through the mail;
Write on your cheque with ballpoint pens that will leave an impression on the paper;
Write the wording on the cheque and the amount in such a way that it is difficult to alter and cancel any blank spaces;
Do not leave your cheque book lying around;
Never sign a blank cheque ahead of time;
Keep paid cheques returned with your bank statement under lock and key or shred them;
Advise your bank as soon as possible of any suspected fraud or loss;
Never give your account number to people you do not know, especially over the phone;
Reconcile your bank statement within 30 days of receipt in order to detect any irregularities;
Avoid making a cheque payable to cash;
Never endorse a cheque until you are ready to cash or deposit it; and
Preferably cross cheques and mark them “not transferable”.