“One fraudster has opened a current account in bombay. Deposited high value cloned cheques of another bank in his banks branch at surat. His banker is a collecting bank. Collecting bank officials have verified the chqs in UV Lamp and the official has signed and confirmed as”Verified under UV lamp”. City Back Office has sent it in CTS clg and the paying banker has passed the same eventhough the signature of the customer are not matching. Who can be held responsible? Is the collecting banker liable to refund the amount. If yes, who is answerable in collecting bank?”

I have received a query as above to an earlier article titled “Cheque Cloning Fraud that exposes the weaknesses in the Banking system”.

Many of the followers of this blog may not know that I was a Banker in my initial professional career and was also a faculty member for a long time teaching Negotiable Instruments Act in particular before the Banking system went digital and integrated Banking laws with Information Technology Act which is the law applicable to electronic documents. Many of the current day Bankers are “Computer Experts” and not experts in “Negotiable Instruments Act”. Veteran Bankers like us some times feel that current day Bankers do Banking as dictated by the systems and many times ignore the transaction behind the computer clicks. I therefore would like to respond to the above query in a little detail.

Before the ITA 2000 came into being, Banking was run on the principles of Banking law and Practice developed over a long time particularly under the British legal system. In India, Banks were administered through the RBI Act 1934, Banking Regulation Act 1939 and Negotiable Instruments Act 1881 among others. After the advent of ITA 2000, “Electronic Documents” were provided with legal recognition along with “Digital Signature”. Initially, Cheque along with Bill of Exchange and Promissory Note (together constituting the family of Negotiable Instruments) were outside the purview of ITA 2000. However, “An Electronic Letter with digital signature” addressed to the Branch manager could be treated as an operating instructions under which debits could be passed to the customer’s account. Later in February 2003, after the Negotiable Instruments Amendment Act 2002 came into force, Cheques in Electronic Form and Truncated Cheques were brought into the system. Since then RBI has been introducing many technical innovations. The Payment and Settlement Act and the more recent UPI and other digital payment systems have brought many changes which often appear to be in conflict with some of the established Banking law provisions.

In June 2001, the RBI under its Internet Banking Guidelines (Following the Mittal Group Report) clearly mentioned that Internet Banking cannot side step Banking laws and Consumer protection regulations applicable to Banking. In 2011, the GGWG Committee (G Gopalakrishna Working Group on E Banking, Information Security and Cyber Frauds) also reiterated that the current legal provisions endorsed by the Internet Banking Guidelines 2001 prevail. Despite this, the current generation of E Bankers often are oblivious to the existence of laws that affect Banking beyond the ITA 2000 and Payment and Settlement Act.

Even the NIBM and the Indian Banker’s Institute have been guilty of neglecting the conventional Banking laws when discussing the technology innovations and hence there is a wide spread ignorance in the industry about how to interpret the Technology along with the legacy laws.

Banking runs on the principles of “Banker-Customer Relation” that has been existing as the foundation of Banking and there is no reason this should be considered as not relevant today. However some aspects of the established principles such as whether  “Banker-Customer Relationship” is between the Customer and his Branch or between the Customer and the Bank as a whole, whether the timing of Banking, the holidays etc require to be re-interpreted in the light of the Anytime, Anywhere Banking and the use of ATMs, Cards, UPI type apps etc., needs elaborate discussion with the Banking law experts.

The query raised above open up an interesting debate on how should we interpret the Paying Bank and Collecting banker’s responsibilities in the current systems.

As per the Negotiable Instruments Act (NI Act), the paying bank is responsible  for “Payment in Due Course” under Section 85 of NI Act. He has to follow the “mandate” of the drawer of the cheque and when alterations have been made, it is liable irrespective of the expertise of a fraudster in committing the fraud through alterations.

The Collecting Banker is responsible for checking and ensuring that the apparent tenor of the cheque makes his customer the payee or the last endorsee of the cheque. He is responsible under Section 131 of NI Act for collection without negligence.

Once the system of “Truncated Cheques” came in to being, the responsibilities of the Paying Banker and Collecting banker has been re-defined to some extent.

In the Truncated cheque system, since the physical custody of the cheque remains with the collecting bank and only an image is sent to the paying Bank, the responsibility to check material alterations shifted from the Paying Banker to the Collecting Banker.

The responsibility of the Paying Banker is stated with the provisio “..Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank (Ed: the collecting Bank) or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image”. (P.S: Since the words while truncating is used in this section, it is considered to be a direction to the collecting banker and not the paying banker)

Only in case the paying banker had a reasonable suspicion about the possibility of material alterations, he was to call for the physical copy of the cheque. Otherwise the certificate of the collecting banker should suffice. The collecting Banker should digitally sign the truncated image and therefore takes the responsibility for the image as transmitted by him. The CTS officer should be personally responsible for applying his digital signature.

The amended Section 131 of the NIAct states “It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care.”

The 2015 amendment to NI Act further expanded the definition of the Cheque in Electronic form but did not affect the operations of the Truncated cheques.

In the case the query has referred to,  the collecting Bank (Surat?)  is responsible to check the material alterations. I am not sure if the collecting bank has actually checked the cheque under UV lamp and it went undetected. The Certificate may therefore be a “False” certificate.

In the event the UV lamp did not detect the erasure, it means that either the UV lamp could be faulty or the printing of cheque leaves was not on proper security form. The UV lamp deficiency is the collecting Bank’s responsibility.

The improper Cheque leaf or the inability to detect the specimen signature difference squarely belongs to the domain of the paying banker.

Paying Banker can be held liable in the above case if the background printing on the cheque did not get erased when the writing was erased.

If the signature is “Forged”, Paying Banker must reject payment and there is no escape even if the forgery is perfect.

If the signature is of the genuine customer only but differs from the specimen, then the issue is different. The Paying Banker may not be held liable for the signature difference since the mandate is to pay if “Signature is Genuine even if there is any difference” not where “Signature is tallying but not genuine”.

In summary, there is negligence both by the Paying Banker and the Collecting Banker. The relationship between the victim and the bank exists at the paying banker’s level and the Paying Banker by virtue of not being able to identify the material alteration is liable to compensate the drawer of the cheque even if the signature is genuine.

The Collecting Banker is liable to the Paying Banker for not being able to detect the material alteration and for failing to do a proper KYC on the fraudster and contributing to the crime.

Since the privity of contract is between the victim and the paying bank, the Paying Bank should be the first accused and the collecting bank should be the second accused. The fraudster could be the co-accused and I would place him in the last.

Victims should not fall into the trap of filing a complaint against the unknown fraudsters leaving the bankers even if it is suggested by the Police.

Simultaneously victims should launch adjudication since Police may fail to locate the fraudster and not keen on pursuing the case against the bankers and the case will eternally lie in the files of the Judiciary.

After the adjudication, it is likely that the Bankers will continue the legal challenge in an appeal and since TDSAT is the appeal authority for adjudication awards, it will be a pain for the victims to follow. They should therefore escalate the issue directly to the High Court since the merger of Cyber Appellate Tribunal with TDSAT is under challenge in Chennai High Court at present.

When the paying banker pays the customer by reinstating the balance in the account, he can claim the money from the collecting Bank. The collecting Bank can in turn collect the money from the fraudster customer for whom he has opened the account. Internal responsibilities (CTS officer or Account opening officer etc) are the issue of the bank to settle.

I hope this throws some light on the points raised in the query.

Naavi

Related Articles:

Cheque In Electronic Form, redefined, Implications on E Banking

ITA-2000 stands amended through NI Act Amendment: 6th December 2002

ITA-2000 and Negotiable Instruments Act : (2nd Nov 2000)

Virtual Negotiable Instruments…A Fantasy?: 22nd Feb 2001