What is cheque truncation system?

Cheque truncation is a clearing and settlement system that makes use of images and electronic payment data. It does not rely on the exchange of physical cheques. Cheques will no longer be taken to the automated clearing house by courier. Telecommunication links will be used by banks and their branches to send cheque data for settlement.

The customer will draw a cheque and present it to the bank. The bank where this cheque is deposited is known as the collecting bank. The collecting bank will take the image of the cheque leaf that has been presented and also read the information line with the magnetic ink character recognition (MICR) code on the cheque. The information together with the amount to be paid is sent to the paying bank through the automated clearing House for settlement.

The new cheque truncation system is relevant for Kenya shillings and domestic foreign currency cheques drawn on Kenyan banks. This includs United States, Euro and Sterling Pound cheques. For offshore drawn cheques, the old process will not be changed

Advantages for Bank cheque truncation system in Kenya

• Cheque truncation will reduce the time it takes to transmit data between banks.
• The time saved will reduce the clearing time
• There will be accurate reconciliation of accounts
• Paperwork will be minimal.
• Fraud avenues emanating from cheque substitution will be reduced because of the elimination of physical movement of cheques. Any changes on the cheque leaf can be detected.
• The liquidity of the economy will be generally improved because of the reduction of the clearing cycle. The time taken to clear funds will be faster ensuring funds circulate in the economy at faster rates.

Security features for the Bank cheque truncation system in Kenya

• The customer should use dark coloured ink which could either be black or blue when drawing the cheques. This is because the new cheques have been redesigned with security features that identify alterations and fraud attempts. Bank stamps should not be placed where they interfere with the clear appearance of the cheque image.
• Transmission of the cheque details from one bank to another will be encrypted and other security techniques enhanced, so that integrity of data from one bank to another is maintained. Banks cannot alter the cheques either and any attempt to make alterations will result in the image being returned to the originating bank.
• There is a security water mark in the design
• Extensive use of new ultra violet sensitive paper
• Tamper evident paper stock
• Micro text features
• Corporate size cheque leaves which are 4 inches width and 7 inches length. The size of the new cheques is important because of the enhanced security features and the new scanners will easily pick and transmit the cheque settlement details for the electronic clearing process.

Unlike in previous operations, where a cheque is unpaid it will not be returned to the customer. The collecting bank will instead issue an Image Returned Document (IRD) to the payee. The document contains the unpaid cheque image, the reason for the return and the payment information. The IRD can be represented depending on the reason for unpaying.The IRD is sufficient advice for the unpaid cheque.

Bank cheque truncation system customer requirements

The old cheque books must be replaced with the new ones. The deadline has been moved to August 2011 from 31^st May 2011. When the deadline expires, the old cheque books will no longer be valid. Customers have to order the new cheque books from their banks as they normally do. The Bank cheque truncation system channel in Kenya will improve the banking sector service to customers.

All cheques are pre-printed crossed with the words “A/C Payee” or Account Payee Not Negotiable”. The Drawer may cancel the crossing by appending full signature against the cancellation. This makes the cheque payable over the counter without having to bank it. Unless it is your bank account that you are withdrawing from, most banks do not allow this kind of transactions. These transactions are known as third party transactions.

Precaution to observe to prevent fraud and forgeries in kenya

• The body of the cheque should be filled in by yourself or by someone authorised by you. This includes the payee name, the date, the amounts in words and figures and the cheque must be signed.
• When drawing cheques, the amount must be written in words, with minimum space between each word commencing close to the phrase “Kenya Shillings”
• The amount in figures should be written in the allocated space. The amount in figures should be terminated by a pair of horizontal lines. The figures should not be separated by commas and the Kenya shillings and cents should be separated by a double dash=
• If there are any alternations that you make when writing out the cheque, you must authenticate or append your full signature above or below the alteration.
• Use indelible Pen or ball pen or permanent ink to ensure that the information is not erased.
• The pen should also not smudge the cheque leaf as the bank will not accept unclear instructions.
• If the check is printed, do not use a typewriter fitted with carbon ribbons or incorporating a correction facility, which allows the “lifting off” of incorrect characters on the paper surface by use of a special correction tape.
• When not in use your cheque book and cancelled cheques should be kept in a safe place where it will be safe with no unauthorised access. If the cheque book is lost or stolen the bank should be notified immediately
• Do not pre-sign cheques leaf without completing the rest of the details especially the pay details. If the cheque leaf or cheque book is stolen, the thief would just complete the rest of the details and cash the cheque.

Financial institutions are not be liable when the customers have been careless or do not follow instructions to prevent fraud and forgeries in Kenya.

Fraud may be corruption, theft, misuse of funds, insider trading, tax evasion counterfeiting, forgery, conflict of interest to name but a few.

Why is fraud committed

There are three main reasons why fraud is committed. These are Motive, Rationalization and Opportunity.

Motive to commit fraud

Motive means the reason behind the action. In banking fraud, fraudsters are motivated by

• Greed because they want to have it all and more that anyone else
• Peer pressure especially where the peers have done very well financially
• Personal financial difficulties like gambling, drug abuse or alcoholism, habits that must be supported and which are very expensive.
• Revenge or grudges will motivate one to commit fraud
• Dishonesty or perceived behavioural norm
• Intimidation or threats will lead you to commit fraud because of fear
• Unrealistic targets that cannot be achieved
• Lenient penalty given to those who have been caught committing fraud will encourage others to attempt fraud since they will get away lightly

Rationalisation of fraud

These are the excuses we give to get away with our actions.

• Fun. Fraud is sometimes explained as a game by those who are fraudulent
• Taking from the rich to give and distribute to the poor. Fraud is excused as a way to ensure that there is equal distribution of wealth, so it is not wrong
• It is the order of the day and everybody is doing it. So to be like everybody else, you must join in the action.
• I will not be caught and so I will go ahead and continue with the activity. Sometimes you may think that nobody will ever know what you have been doing
• I am testing the system and control is a good excuse. The results of the fraudulent activity are never disclosed to the authorities in the bank after the ‘testing’ has succeeded
• I am being underpaid and so I must get my cut or fair pay even if I have to commit fraud to get even.

Opportunity for Fraud

• Absence of procedures. The rules that govern how the company is run are not there so the employees and the customers do what they want or think should be done. There is no precedence which creates opportunities for fraud to be perpetrated
• Inadequate or lapses in controls though better than having any procedures, is still lacking since fraud can still be perpetrated easily
• Inadequate supervision or lax management. When the management is not alert or too harassed to adequately supervise the staff and ensure the procedures are adhered to, fraud opportunities are created.
• Inadequate auditing procedures, control checks and surprise checks will lead to creation of fraud opportunities. The bank must ensure that checks are done periodically.
• Inadequate training and knowledge. Without knowledge the opportunities to commit fraud are unlimited since the fraud detection mechanism is also absent
• Inadequate staff hiring practises to ensure vetting of prospective employees. The Human resources department must ensure that the employees are vetted adequately to filter out the undesirable staff compliment.
• Inadequate physical security. It is very important that the bank ensures that physical security like safes, locks, security cameras and security guards etc are available and working. Physical security discourages fraud opportunities

Banks and other organisation must ensure that they put in place measures to counter fraud and reduce their loses.