US Check Cashing

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US Checks circulate around the world. Whether they are personal checks, company checks, money orders and traveller checks, checks drawn against US Banks are sent, taken and written in many countries around the world. Years ago, these checks were received by banks for deposit or cashed by foreign exchange firms but they had to be sent by mail or courier services back to the US for deposit.

Sometime in the 90s and the early years of this century US customs started stopping the envelopes containing the checks sent for deposit, even if they were fulfilling all the required documents and reports. This concerted effort of the US regulators to stop these checks in fear of being the source of money laundering and other suspicious activities and even if they were later released after legal recourses were used by the institutions involved, being time-sensitive materials, and after loses and hardships, the deposit & cashing of US checks became a service that few insitutions decided to continue offering.

On the other hand, very few banks were accepting third-party checks for deposit, worried about the US regulator’s view of these checks as being high risk.

But times have changed. Fintechs developed remote-capture systems for digitizing the paper checks, regulators came with new laws and requirements for AML controls that came into place, not after several institutions were fined for lack of good controls.

Remote deposit capture (RDC) is a technology-based method that lets electronic images of checks, instead of the original paper versions, to be transmitted from a financial institution to another, so banks can ultimately accept checks for deposit. Photographs or scanned images of the check’s front and back it is submitted electronically and the Check 21 legislation that became effective in the US in 2004 made remote deposit capture possible.

Check Images
The check images used in remote deposit capture have to meet certain technical requirements to make sure they can be accepted as the “substitute” for the physical check. Not only being a minimum number of DPIs, dots per inch, it is necessary, but they can’t exceed a certain file size and being in a certain file format. There are some limitations. Some banks might not accept certain types of checks for deposit by remote deposit capture (traveler’s checks, money orders. third-party checks, etc).

Benefits for all

Remote deposit capture in the US is the technology that most banks have installed in their mobile banking where smartphones conveniently let’s the customer deposit checks. The process brings cost-savings for all parties involved: it eliminates trips to the bank for customers, checks can be deposited 24/7. Businesses use RDC to deposit checks they receive from customers, domestic check-cashers can use RDC to transmit the checks to the bank or check-processors, saving time and for international check-cashers cost and time savings are crucial allowing them serving customers quicker and as well as drastically reducing the cost.

What Is Check 21?
The Check Clearing for the 21st Century Act (Check 21) is a federal law that took effect on October 28, 2004, and gives banks and other organizations the ability to create electronic image copies of consumers’ checks, in a process known as check truncation. The images are then sent to the relevant financial institutions to be processed, where money from a consumer’s account is transferred to the receiving party’s account. The electronic copy of the original check is known as a substitute check.

The idea of using technology to reduce or eliminate the costs involved with paper check processing was the driving force for the approval of this Act. Under the Check 21 Act, a bank avoided the costs of presenting paper copies of checks instead of sending the electronic copies of said checks and after a predetermined holding period elapsed, banks can destroy the original paper check.

Under the Check 21 Act, the process known as remote deposit has become widespread as it allows consumers to deposit checks into their bank accounts remotely via the use of a scanner or digital camera from their mobile phone and check-cashing firms to scan checks of customers and present them to the bank.

What is the difference between eChecks & Check21?

The difference is not significant and eCheck is mostly a marketing term. eCheck programs allows the processing of checks at a point of sale, just like a credit card. Checks are converted electronically with a check reader or imager to capture essential account information like bank account and routing numbers. Additional identiy information is required by the company receiving the check.

Money Laundering Concerns:
U.S. bank regulators have always been concerned about the high risk of third-party checks and the weaknesses in check clearing processes in regards to the potential use by money launderers. The massive numbers of scanned checks that are cashed domestically and internationally need to be screened for suspicious activity and it has taken time for compliance systems to develop sufficient controls and red alerts to monitor them.

Remote deposit capture, the technology that allows check-cashing by specialized firms in the US or internationally to scan checks and deposit them at a U.S. bank (a process that can take just seconds and avoids the hassle of transporting physical checks overseas) has made it easier to use technology to monitor these checks and extract from them the necessary information to automate some of the AML screening.

Of course, the controls must start at the source since in the check-cashing business KYC if of the utmost importance. But US regulators are concerned that electronic check processing could be exploited by money launderers using travelers checks or money orders and special attention must be given to these two types of US checks.

In 2012, the OCC – Office of the Comptroller of the Currency, identified a number of anti-money laundering deficiencies at Citigroup, including a self-reported monitoring gap that resulted in the bank failing to file, in a timely manner, legally required reports of suspicious activity that moved through the bank’s remote deposit capture business. Citigroup fixed all the problems identified by the OCC, and it is important to note that the regulatory order did not identify any specific instances of money laundering or terrorist financing.

Few banks are now providing remote deposit capture services for the cost of doing thorough compliance of the process and an EDD – Enhanced Due Diligence of the firms offering check-cashing to customers. Financial Services Compliance costs have skyrocketed in the last 5-10 years as banks and financial services companies understood, from fines received by US regulators, of the failures of the past.

In 2010, Wachovia (which Wells Fargo bought in 2008) agreed to pay $160 million as part of a money-laundering investigation. The fine was a result of the bank not having an effective anti-money laundering policy or procedure to monitor transactions to detect and report potential money laundering activity, as required by the BSA. The US DOJ stated that some $47 billion moved through the bank from international correspondent accounts using remote deposit capture. The deposits, made between 2005 and 2007, included traveler’s checks and money orders.

In 2011, Utah-based bank Zions First National Bank received an $8 million civil penalty by the OCC and FinCEN for their remote deposit capture that managed close to $5.4 billion in 2006 and 2007 from international clients. The bank conducted a voluntary look back in 2008 and reported the suspicious activity.

International Check-cashing using remote deposit capture has become a very specialized service that requires strong compliance procedures, Enhanced Due Diligence on every institution in the chain and continuous monitoring to ensure the level of safety that this service requires.

Sources:
1) U.S. probing money laundering in check processing – https://www.reuters.com/article/us-financial-banks-laundering/u-s-probing-money-laundering-in-check-processing-idUSBRE83M1DG20120423
2) OCC Assesses Civil Money Penalty Against Zions – https://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-16.html
3) Wachovia, One Of Nation’s Largest Banks, To Pay $160 Million In Largest BSA Penalty Ever – https://www.lexisnexis.com/legalnewsroom/financial-fraud-law/b/blog/posts/wachovia-one-of-nation-s-largest-banks-to-pay-160-million-in-largest-bsa-penalty-ever