Non-sufficient funds

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Non-sufficient funds (NSF) is a term used in the banking industry to indicate that a cheque is not being honoured (ie., paid) because insufficient cleared funds are in the account on which the cheque was drawn. [1] An NSF check is often referred to as a bad check, dishonored check, bounced check, cold check, rubber check, returned item, or hot check. In England and Wales and Australia, such cheques are typically returned endorsed "Refer to drawer", an instruction to contact the person issuing the cheque for an explanation as to why it was not paid. [2] If there are funds in an account, but insufficient cleared funds, the cheque is normally endorsed “Present again”.

Contents

When more than one cheque is presented for payment on the same day, and the payment of both would result in the account being overdrawn (or below some approved credit limit), the bank has a discretion as to which cheque will be paid and which dishonoured. The bank cannot partially pay on a cheque, so that it must either pay the cheque in full or dishonour it. If a bank declines to pay a cheque, it must return the cheque to the person who deposited the cheque or presented it to be cashed. A bank has a general discretion whether or not to pay the cheque in such circumstances, but such payment on one occasion does not bind the bank to do so again on another occasion.

Reasons for dishonour

Cheques may be dishonoured by a financial institution because there are insufficient cleared funds in the account to cover the cheque. Other reasons for not honoring a cheque include:

Consequences

Among the consequences of issuing a NSF cheque are actions by financial institutions, civil liability to the drawee, and possible criminal penalties. When a bad cheque is negotiated, the recipient of the cheque may choose to take action against the drawer. The action that is taken may be a civil collection action or lawsuit, or seeking criminal charges, depending on the amount of the cheque and the laws in the jurisdiction where the cheque is drawn.

Financial institutions

When a bad cheque is drawn, the cheque writer may be charged a fee by their financial institution. If paying the item puts the account holder in a negative status by a relatively small amount, the bank may choose to honor the cheque. When this occurs, the account will be overdrawn, and the fees charged by the bank will place an extra burden on the account until the overdraft is covered. If the paying of the item would render the account significantly overdrawn, the bank may choose not to honor the cheque. The item will be returned to the depositor's bank, and ultimately to the depositor. The amount of the check plus the depositor's bank's fee will be debited from the depositor's account. The depositor then may choose to re-submit the cheque, hoping it will clear on a second attempt, or else proceed immediately with collection activities, civil or criminal.

Civil consequences

If the dishonored check has been scanned and replaced by a substitute check, the original check is not returned to the depositor, but instead the substitute check will be marked "not sufficient funds" and returned to the depositor. [3] The recipient may choose not to accept checks in the future from the writer (typically recorded on a paper or electronic "Do not accept checks from..." list), or may suspend the check-writer's privileges until the check-writer has made good on the debt.

The recipient may also choose to report the writer to a database service. This may lead to other merchants in the future refusing to accept checks from the writer or a joint account holder, or the writer having trouble obtaining a checking account at another bank. If a merchant or other place of business receives too many bad checks from customers, it may simply decide to not accept any checks at all from anyone. [4]

Criminal consequences

In some cases the issuance of a NSF check may result in criminal prosecution of the drawer of the check. Criminal charges are more likely where the drawer can be shown to have issued the check knowing that it would not be honored. Charges are also more likely when the NSF check is for a large amount, or where the drawer issues multiple NSF checks. [5]

Prevention

Steps that can be taken to reduce the likelihood of a bad check include:

India

In India, a bounced check is a criminal offense, punishable by fines and/or jail term, under Section 138 of the Negotiable Instruments Act, 1881. [6] [7]

United Arab Emirates

Until January 2013, a bounced check was a criminal offense in the United Arab Emirates that led to imprisonment of the person who wrote it. [8]

United States

In many jurisdictions in the United States, a bad check restitution program exists that allows recipients of bad checks to collect the funds from the local district attorney's office, regardless of the amount. An agency run by the district attorney will pursue the drawer of the check by attempting to collect the funds in exchange for avoiding criminal prosecution. The check drawer will be responsible to cover the amount of the check, plus all fees to which the recipient is legally entitled, plus a program fee. The drawer will also be required to take a course designed to improve check-writing habits. These programs are controversial and in recent years, have come under fire in lawsuits. Normally, if check writer can cover up their bad credits in sixty days, all charges will be dropped.

In some jurisdictions, for a criminal prosecution on a bad check there must be some element of fraud involved in the issuance of the check. In some U.S. states, if the check drawer informs the party they are uttering the check to that it will not clear at the current time (such as asking someone to “hold” a check for a few days), if the check bounces, they can still be sued for the value of the check, but warning the recipient before acceptance that the check will not clear immediately negates the element of fraud and prevents criminal prosecution. For similar reasons, a post-dated check will not normally support a conviction for issuing a NSF check. [1]

United Kingdom

Use of the term "Refer to Drawer" became standard in England and Wales after bank was successfully sued for libel after returning a cheque with the phrase "Insufficient Funds" after making an error; the court ruled that, as there were sufficient funds, the statement was demonstrably false and damaging to the reputation of the person issuing the cheque. [2] Even with the use of this revised phrase, the mere implication that funds were insufficient has been ruled to be libelous in other cases of banks mistakenly refusing to pay cheques. [9] [10]

Metaphorical use

Martin Luther King Jr. used the concept as a metaphor in his I Have a Dream speech. He compared the Declaration of Independence to a bad check. [11]

See also

Related Research Articles

A transaction account, also called a checking account, chequing account, current account, demand deposit account, or share draft account at credit unions, is a deposit account held at a bank or other financial institution. It is available to the account owner "on demand" and is available for frequent and immediate access by the account owner or to others as the account owner may direct. Access may be in a variety of ways, such as cash withdrawals, use of debit cards, cheques (checks) and electronic transfer. In economic terms, the funds held in a transaction account are regarded as liquid funds. In accounting terms they are considered as cash.

Cheque clearing

Cheque clearing or bank clearance is the process of moving cash from the bank on which a cheque is drawn to the bank in which it was deposited, usually accompanied by the movement of the cheque to the paying bank, either in the traditional physical paper form or digitally under a cheque truncation system. This process is called the clearing cycle and normally results in a credit to the account at the bank of deposit, and an equivalent debit to the account at the bank on which it was drawn, with a corresponding adjustment of accounts of the banks themselves. If there are not enough funds in the account when the cheque arrived at the issuing bank, the cheque would be returned as a dishonoured cheque marked as non-sufficient funds.

Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial institution. In many instances, bank fraud is a criminal offence. While the specific elements of particular banking fraud laws vary depending on jurisdictions, the term bank fraud applies to actions that employ a scheme or artifice, as opposed to bank robbery or theft. For this reason, bank fraud is sometimes considered a white-collar crime.

Cheque fraud, or check fraud, refers to a category of criminal acts that involve making the unlawful use of cheques in order to illegally acquire or borrow funds that do not exist within the account balance or account-holder's legal ownership. Most methods involve taking advantage of the float to draw out these funds. Specific kinds of cheque fraud include cheque kiting, where funds are deposited before the end of the float period to cover the fraud, and paper hanging, where the float offers the opportunity to write fraudulent cheques but the account is never replenished.

A check verification service provides businesses or individuals with either the ability to check the validity of the actual check or draft being presented, or the ability to verify the history of the account holder, or both.

Cheque Method of payment

A cheque, or check, is a document that orders a bank to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The person writing the cheque, known as the drawer, has a transaction banking account where their money is held. The drawer writes the various details including the monetary amount, date, and a payee on the cheque, and signs it, ordering their bank, known as the drawee, to pay that person or company the amount of money stated.

A cashier's check is a check guaranteed by a bank, drawn on the bank's own funds and signed by a cashier. Cashier's checks are treated as guaranteed funds because the bank, rather than the purchaser, is responsible for paying the amount. They are commonly required for real estate and brokerage transactions.

In economics, float is duplicate money present in the banking system during the time between a deposit being made in the recipient's account and the money being deducted from the sender's account. It can be used as investable asset, but makes up the smallest part of the money supply. Float affects the amount of currency available to trade and countries can manipulate the worth of their currency by restricting or expanding the amount of float available to trade.

Paycheck Document issued by an employer to pay an employee for services rendered

A paycheck, also spelled pay check or pay cheque, is traditionally a paper document issued by an employer to pay an employee for services rendered. In recent times, the physical paycheck has been increasingly replaced by electronic direct deposits to the employee's designated bank account or loaded onto a payroll card. Employees may still receive a pay slip to detail the calculations of the final payment amount.

A chargeback is a return of money to a payer of some transaction, especially a credit card transaction.

Overdraft Payments from a bank account exceeding the balance

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

A banker's draft is a cheque provided to a customer of a bank or acquired from a bank for remittance purposes, that is drawn by the bank, and drawn on another bank or payable through or at a bank.

In banking, a post-dated cheque is a cheque written by the drawer (payer) for a date in the future.

A bad check restitution program (BCRP) is a program in the United States that works to retrieve funds from bad check writers in order to repay moneys owed to the recipients of the checks. In other words, these are debt collection operations. Many of these programs are operated by private companies that add fees that may exceed $200, regardless of the amount of the check. They call these operations "bad check enforcement," or "bad check restitution," or "bad check diversion." Sometime, these programs are actually run in house by real prosecutors. The private companies send check writers letters which state basically, that to avoid being prosecuted, the check writer may enroll in an expensive diversion program. In most instances, the prosecution threats are false and made only to coerce payment of high fees.

Check kiting

Check kiting or cheque kiting is a form of check fraud, involving taking advantage of the float to make use of non-existent funds in a checking or other bank account. In this way, instead of being used as a negotiable instrument, checks are misused as a form of unauthorized credit.

A collection item is an item presented to a bank for deposit that the bank will not, under its procedures, provisionally credit to the depositor's account or which the bank cannot provisionally credit to a depositor's account. Collection items do not create float. Payment must be received from the payor bank before the item may be credited to the depositor's account.

Warrant of payment

In financial transactions, a warrant is a written order by one person that instructs or authorises another person to pay a specified recipient a specific amount of money or supply goods at a specific date. A warrant may or may not be negotiable and may be a bearer instrument that authorises payment to the warrant holder on demand or after a specific date. Governments and businesses may pay wages and other accounts by issuing warrants instead of cheques.

Negotiable Instruments Act, 1881 is an act in India dating from the British colonial rule, that is still in force largely unchanged.

A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below.

<i>Canada Trustco Mortgage Co v Canada</i>

Canada Trustco Mortgage Co v Canada, is a significant case of the Supreme Court of Canada on the intersection of the Income Tax Act and the Bills of Exchange Act and the ability to seize funds that have been deposited by a debtor into an account held at a financial institution in Canada.

References

  1. 1 2 Larson, Aaron (18 August 2016). "What to Do if You Receive a Bad Check". ExpertLaw. Retrieved 29 September 2017.
  2. 1 2 Ward, Paul (2010). Tort Law in Ireland. Kluwer Law International, 2010. p. 129. ISBN   9041133321 . Retrieved 29 September 2017.
  3. ↑ "Anatomy of a Substitute Check" (PDF). Federal Reserve Banks. 2004. Retrieved 29 September 2017.
  4. ↑ Wood, Leslie (2005-06-29). "DA explains consequences of writing bad checks in Gallup". Independent. Archived from the original on 22 April 2008. Retrieved 2008-05-09.
  5. ↑ See, e.g., "Bad Check Questions". Hall County, Georgia. Retrieved 28 January 2019.
  6. ↑ "THE NEGOTIABLE INSTRUMENTS ACT, 1881 ACT NO. 26 OF 1881". 1881.
  7. ↑ "The legal consequences with bounced cheques! - Yahho India Finance".
  8. ↑ Clancy, Rebecca (2013-01-01). "UAE stops jailing expats for bounced cheques". The Telegraph. Retrieved 2013-05-22.
  9. ↑ "Bounced cheques yield libel damages". The Independent . 21 July 1992. Retrieved 2009-09-24.
  10. ↑ Ackland, Richard (6 August 2010). "Cheques and free speech get bounced - Aktas v. Westpac". Sydney Morning Herald. Retrieved 13 June 2014.
  11. ↑ King Jr., Martin Luther (2020-08-08). "Martin Luther King Jr. | I Have a Dream | delivered 28 August 1963, at the Lincoln Memorial, Washington D.C." American Rhetoric. Retrieved 2020-09-06.
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