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Dealing with Duplicates 3-Part Session Series
-Session 1- Legal Aspects, Warranties & Recourse
Phyllis Meyerson, AAP, CCM, Executive Vice President, ECCHO
Ellen Heffner, NCP, Director, Product Management, ECCHO
John Leekley, Founder & CEO RemoteDepositCapture.com
April, 2013
“Duplicates” – A Growing Concern Webinar #1: Dealing with Duplicates: Legal Aspects, Warranties & Recourse April 30, 2013, 2:00 – 3:00 PM ET – Register / View Now Webinar #2: Dealing With Duplicates: Cause, Effect & Management May 17, 2013, 2:00 – 3:00 PM ET – Register / View Now Session at the RDC Summit: Industry Update, Case Studies & Discussion September 25, 2013, 1:00 – 2:30 PM In-Person Session at the RDC Summit – Register Now Industry Discussion & Resources on RemoteDepositCapture.com • ECCHO Resource Documents • Open Industry Discussion • Click Here.
Session 1 – Legal Considerations, Warranties & Recourse Prepared for: RemoteDepositCapture.com
Apr
il 30
, 201
3
Dealing with
DUPLICATES
Copyright© 2013 by the Electronic Check Clearing House Organization
Session Overview • Background • Examples of Duplicates • Rules and Warranties • Holder in Due Course • Reference Information • Q&A
4
Background
Duplicate • Webster’s New Collegiate Dictionary –
Copyright 1977 • Duplicate
– Consisting of or existing in two corresponding or identical parts or examples
– Being the same as another – Either of two things that exactly resemble or
correspond to each other – Two copies both alike – To make an exact copy of
6
Check 21 • Were Duplicates expected? • In December 2000 ECCHO wrote to Federal
Reserve – “Control of Duplicates
• “There may be multiple legal equivalents as the result of multiple intermediaries and multiple conversions
• “Multiple legal equivalents of the same item may arrive from multiple collecting and/or returning banks
• “Multiple legal equivalents of the same item may arrive over multiple (many days)
• “How can the receiving bank prevent multiple postings, multiple returns, multiple NSF charges, multiple return charges, etc.?”
7
There are No Duplicates!! • No double debit warranty under Check 21 and other
image exchange rules • Check 21 was implemented October 2004 • By early 2005 duplicate substitute checks
– Print issues – mostly remedied – System issues – mostly remedied
• Image exchange caused image duplicates – System issues – mostly remedied – RDC issues ???
• RDC Duplicates – Outside control of banks – Industry issue and concern – As RDC continues its growth, duplicates will continue
• Fraudulent intent – “Sammy Shyster” • Unintentional Error – “Sammy Stupid”
8
Examples of Duplicates
INTERMEDIARY PAYING BANK
BOFD
IMAGE or
Deposit Ck
DEPOSITING CUSTOMER
Check
Sub Ck
Sub Ck Sub Ck
DRAWER CUSTOMER
Duplicates
Duplicate Example
10
• Duplicate Substitute Checks created by intermediary
Sub Ck
BOFD A
Paying Bank C Customer
Company
Statement
Statement IMAGE
Duplicate Example • Electronic Image received and paid, related
physical check received and paid
11
IMAGE
Agreement
BOFD A Paying Bank C Customer Company
Statement
Statement
IMAGE
IMAGE
Duplicate Example • Receipt from same Sending Bank two electronic
images from same original paper check and does not return
12
Deposits Check
IMAGE
BOFD A
Paying Bank C
Agreement
Customer
Company
Statement
Statement
BOFD B
IMAGE
IMAGE
Duplicate Example • Receipt from two different Sending Banks two
electronic images purported to be created from same original paper check and does not return
13
Different Indorsements • Do different indorsements indicate
different paper checks? • Duplicate arose from same image, paper
check source of image or other image of same original check – If two payments arose from two different
original checks, then no duplicate claim • Two different indorsements not
determination of different paper checks – Additional review and investigation needed
14
IMAGE
BOFD A
Paying Bank C
Agreement
Customer
Company
Statement
Statement
BOFD B
IMAGE
IMAGE
Electronic Indorsement RT # of
BOFD A
Electronic and/or Physical
Indorsement RT # of BOFD B
Different Indorsements
15
Identification Examples • Payee customer has electronic
overlay indorsement by RDC – Customer indorses to check casher – Two images have different payee and
bank indorsements – Check images arose from same original
paper check • It is a duplicate
16
Identification Examples • Payee customer signs/indorses paper
check and deposits through RDC – Customer opens second account and
deposits – Same payee indorsement, but different
bank indorsements – Check images arose from same original
paper check • It is a duplicate
17
Identification Examples • Fraudster creates multiple counterfeit
checks and deposits at different banks – Checks look the same – Different payee and bank indoresments – Check images arose from different
original checks • Not a duplicate
18
Identification Examples • Customer prints and signs two
identical checks – Same amounts and payees – Drawer Customer mails two checks to
Payee Customer – Payee Customer uses RDC to deposit
checks at same or different BOFDs – Two check images created from
different original checks • Not a duplicate
19
Impacts • Duplicates typically affect innocent parties • Bank generated duplicates
– Impact end customers • Drawer account debited • Payee customer account debited when duplicate returned
– Payee demanding funds from drawer who already paid item
• Customer generated duplicates – Impact end customers
• Drawer account debited
– Bank impacts • Effort to handle adjustments • Could be out funds
• HIDC issues – Impact to drawer customer who is innocent party
20
Rules and Warranties
Duplicate Warranty • No double debit warranty under Check 21 and
other image exchange rules • Check 21 was implemented October 2004 • Reg CC, ECCHO Rules, Reg J and OC3
duplicate warranty – With minor variations the warranty reads (ECCHO)
(Section XIX(L)(7)) • “Sending Bank warrants to Receiving Bank with respect to
each Electronic Image sent to the Receiving Bank that: (7) the Receiving Bank and any other person will not receive a transfer, presentment or return of, or otherwise be charged for, the Electronic Image, the Related Physical Check of that Electronic Image, or a paper or electronic representation of the Related Physical Check such that the person will be asked to make a payment based on an item that it already paid;” 22
Other Rules • NACHA rules have similar warranty
– Against presentment of original item for check conversion
• No duplicate warranty exists on original item
• Warranty limited to situation where Receiving Bank pays item already paid – Not applicable for represented item
• Intended to protect Receiving Bank and drawer customer from losses regardless of form of duplicate item
23
Representment • Warranty limited to situation where
Receiving Bank pays item already paid – Warranty not applicable where
Receiving Bank returned and reversed settlement of first item, then receives second item
– Receiving Bank only paid single item
24
Paying Bank Bank of First Deposit (BOFD)
Sub Ck Return
IMAGE
IMAGE Representment
Adjust as Duplicate
(4)
Image Return
(2)
NSF
Deposit Ck
(1)
Original Ck Representment
(3)
Representment Scenario
25
Duplicate Warranty • Development of Reg CC for Check 21
issue regarding duplicate warranty resulting from fraudulent item raised
• ECCHO requested Fed to recognize that loss should be at BOFD that took item from fraudster – That bank in better position to deal with loss
or prevent loss • Fed’s comment Act’s warranty does not
depend on bank’s knowledge or fault and did not accept recommendation
26
Duplicate Warranty • Reg CC Commentary states
– Warranty given even if demand for duplicative payments results from fraudulent substitute check about which warranty bank had no knowledge
– Example provided • Electronic version sent to both Bank A and Bank B,
creates substitute check to Bank C • Bank A and Bank B both made warranties to Bank C • Bank C could pursue warranty claim for loss as
result of duplicative payment against either Bank A or Bank B
27
BOFDs Subject to Claim • To whom can Paying Bank C make
claim? – To either BOFD A or BOFD B – BOFD A and BOFD B both made
warranty to C • Paying Bank has option to either
– BOFD B being second does not limit Paying Bank to make claim • Reg CC and image language the same
28
BOFD A
Paying Bank C BOFD B
IMAGE
Return/Adjust as Duplicate
IMAGE
BOFDs Subject to Claim
29
Return/Adjust as Duplicate
Either/Or
Claim Between BOFDs • Is there basis for claim between BOFDs? • Rules and check law does not address
claims between BOFDs – No exchange between BOFDs, no warranty
made – Warranties arise from exchange of check
images • Reg CC does not address this for substitute checks
– Unknown if there is basis for loss sharing under other law • Consult legal counsel • Discuss with 2nd BOFD to reduce or share loss
30
Claim Between BOFDs • BOFD A and its customer has agreement,
usually requiring customer to secure original paper check – That agreement is contract law between
BOFD A and its customer • No other party is subject to that agreement
• Nothing in any rule set regarding not “securing original paper” – For reason of BOFD B to reject claim – For reason of BOFD B to make claim to
BOFD A
31
BOFD A
Paying Bank C BOFD B
IMAGE
Return/Adjust as Duplicate
IMAGE
Does BOFD B have Claim against
BOFD A??
Claim Between BOFDs
32
Holder in Due Course (HIDC)
Consumer RDC • Recently issue of Holder in Due Course (HIDC) claims
and application of no double payment warranty been raised
• Changes to RDC landscape – RDC volume growing as more banks offer service
• More check images cleared arising from mobile RDC – Greater RDC volume result in increase duplicate
presentments to paying banks and subsequent warranty claims
• Possible sources of duplicate presentment in RDC context – Customer Error – customer accidently deposits same item
twice – Customer Fraud – customer intentionally deposits items twice – Theft From Customer – customer deposits RDC, then check is
cashed or deposited by thief 34
Consumer RDC • RDC duplication different compared to banks’ past
experience with internal duplication of images – Internal Bank Duplication: Duplicates caused inside banking
system • Funds generally in banking system and can be recovered using
adjustment process and warranty claim • No HIDC outside of banking system holding original paper check
– Customer RDC Duplication: Involves creation of duplicate item by persons outside of banking system • Funds not in banking system at time duplication discovered • Funds not recoverable from depositing customer account • HIDC may have original check and may demand payment from
drawer
• Current duplicate warranty Rule covers HIDC-related duplicate payment warranty claims
35
HIDC • Payment to holder that may give rise to
warranty claim by paying bank for double payment – Holder may demand payment from drawer when
item returned unpaid by paying bank • Claims by holder made outside of check collection process
• “Holder” person that comes into possession of negotiable instrument – “Holder in due course” is type of holder, and takes
check for value, in good faith and without notice check is overdue or been dishonored • Holder make claim against drawer regardless of certain
defenses • Not every holder qualifies as “holder in due course”
– Depends on facts and circumstances 36
HIDC Scenario
37
BOFD A
Paying Bank
Agreement
Customer Drawer BOFD B Check Casher
HIDC
(2)
Return or Adjust
Duplicate
(3) (3)
Charge Account
(3)
HIDC Claim
(4)
IMAGE
Statement
IMAGE (ICL)
(1) (1)
(1)
IMAGE (ICL)
IMAGE (2)
(2)
(2) Statement
HIDC • Payment to holder by drawer or paying bank to resolve
claim by holder may result in breach of double payment by the first BOFD – Breach of double payment warranty arises because drawer is
asked to make two payments for same item – Drawer customer paid claim to holder in due course and also
paid image presented to account by first sending bank
• Warranty against double payment covers where person “asked to make a payment” twice – Paying bank, when reimbursed its drawer customer incurred
loss due to sending bank’s breach of warranty – Due to loss from breach of warranty, paying bank make claim
under duplicate warranty to first sending bank
38
HIDC • ECCHO Rules and OC 3 not provide warranty directly to
drawer – Warranty against double payment made only to paying bank – ECCHO Rules do not address relationship of drawer to its bank
• Paying bank could have legal responsibility to its drawer for duplicate payment under account agreement or applicable law
• Paying bank needs to evaluate and determine its responsibility to reimburse drawer
• If bank reimburses drawer or directly pays holder, bank may have warranty claim against original sending bank – Rules not establish or limit defenses sending bank may raise
against warranty claim arising from double payment – UCC and other law may provide for defenses
39
HIDC • Sending bank may claim person who claimed holder or
holder in due course status not entitled to payment • No requirement under Rules for paying bank to include
information that establishes its obligation to make payment or reimbursement – Paying bank not required to investigate claim of holder prior to
payment – Only element required to make claim is for paying bank to
establish existence of double payment and incurred loss – Sending bank cannot refuse claim solely on basis paying bank
not provide information to establish second payment is appropriate
– Rules and matrix governing adjustments provide required detail for claim
40
HIDC • This application of warranty against double
payment consistent with Check 21, Regulation CC and Rules to protect paying bank and drawer – Sending bank introduced risk by allowing customer
to engage in RDC • Appropriate to bear risk of loss from double payments
• Paying banks and customers encouraged not pay holder in due course claims if believe holder does not have legitimate claim for payment of item – Example, customer or paying bank reason to
believe holder participated in fraud or theft
41
HIDC Scenario
42
BOFD A
Paying Bank
Agreement
Customer Drawer BOFD B Check Casher
HIDC
Statement
IMAGE IMAGE (ICL)
(1) (1)
(1) Adjust Duplicate
(7)
Return or Adjust
Duplicate
(3) (3)
Charge Account
(3)
Statement
(2)
IMAGE (ICL) IMAGE
(2)
(2)
(2)
HIDC Claim (4)
Drawer Pays HIDC Claim
(5)
Bank Reimburse Drawer
$$$ (6)
ECCHO Plans • Update Commentary to assist
Members in understanding application of warranty in HIDC scenarios – Short commentary – October update
• Update duplicate white paper with Holder in Due discussion – This summer
43
RDC Duplicates Part 2 • RDC Duplicate Webinar Part 2
– Risks and Risk Mitigation – Operational Considerations
• Prevention and Detection
• May 17, 2013 at 2:00 p.m. ET (1:00 p.m. CT, 12:00 noon MT and 11:00 a.m. PT)
• Don’t miss this session • Click Here To Register!
44
Additional Information • For additional information please see the following
– Avoid Duplicates! • http://www.eccho.org/documents/Duplicates_000.pdf
– A Guideline Document on Duplicate Image/IRD Prevention and Detection
• http://checkimagecentral.org/pdf/DuplicatePreventionAndDetection.pdf – Resolving Duplicates as Adjustments versus Returns
• http://checkimagecentral.org/pdf/ResolvingDuplicatesAsAdjustmentsVersusReturns.pdf
– FIs offering RDC should review and implement FFIEC guidance on RDC which addresses FI responsibility to identify and control risks
• http://www.ffiec.gov/pdf/pr011409_rdc_guidance.pdf – White Paper: Additional Issues Regarding Possible Duplicate Payment
of Check items • http://www.eccho.org/uploads/WhitePaperDuplicateIdentiticationVersion0117
11(1).pdf • Coming soon updated white paper to include HIDC considerations
45
Apr
il 30
, 201
3
Thank You
Phyllis Meyerson [email protected] 214-273-3202
Ellen Heffner [email protected]
214-273-3211
Electronic Check Clearing House Organization 3710 Rawlins Street; Suite 1075
Dallas, Texas 75219
www.eccho.org
“Duplicates” Session Series Webinar #1: Dealing with Duplicates: Legal Aspects, Warranties & Recourse April 30, 2013, 2:00 – 3:00 PM ET – Register / View Now Webinar #2: Dealing With Duplicates: Cause, Effect & Management May 17, 2013, 2:00 – 3:00 PM ET – Register / View Now Session at the RDC Summit: Industry Update, Case Studies & Discussion September 25, 2013, 1:00 – 2:30 PM In-Person Session at the RDC Summit – Register Now Industry Discussion & Resources on RemoteDepositCapture.com • ECCHO Resource Documents • Open Industry Discussion • Click Here.
A Unique Perspective RemoteDepositCapture.com is the leading news, information, products and services portal for the RDC Industry.
– We are NOT a reseller, solution provider, etc. – We ARE experts in, and an open resource for the industry. – We work with the vast majority of leading solution providers, FIs, processors. – Thousands of FIs, corporations, businesses and consumers visit the site each month. – We are supported by many industry-leading organizations. – We were involved in the formulation of the FFIEC RDC Risk Management guidance
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Copyright 2013, RemoteDepositCapture.com 48
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Copyright 2013, RemoteDepositCapture.com 49
