In the era of rapid technology enhancements, I am sure many of you would be using cheques as a part of your day to day banking needs and if you do, perhaps the content of this article may sound basic. However based upon my ongoing interaction with people, I have come to notice that not all know about this important financial instrument and the key safeguards which they must observe to prevent any financial inconveniences or at worse frauds. A lot of the content in this article is relevant for global usage of cheques and some of the content may be relevant just for India. We will split this article into basics of a cheque and top tips for its safe usage.
Cheque is a mechanism to allow people access the funds in their bank accounts. This could be either used to withdraw cash or to transfer funds to some one else’s account by providing them a filled cheque. The basic security behind a cheque can be closely related to a two-factor authentication, i.e. combination of what you have + what you know. You need to have an authentic cheque book issued by a bank which incorporates multiple security features to prevent forgery. Just handing over a blank cheque to a recipient would not help, you would also need to sign it (What you Know) with the same signatures which you have provided to your bank.
Lets have a look a sample cheque to understand a few of its features (see image below). We have highlighted a few areas in red numbered stars
- A cheque needs to be addressed to a recipient or a payee. Payee name is written in the first line of the cheque, e.g. in our example ‘Adam Jones’
- Cheque needs to be dated (top right hand corner). You have a flexibility to issue a post dated cheque in future. But remember that a cheque looses its validity within 3 months of the date written on the cheque (Star 8)
- Cheque has to have an amount both in numbers (Star 5) and in words. Both the amount in numbers and in words need to match else the bank will reject the cheque payment. This is one of the security features which aims to prevent a fraudulent modification of the amount.
- Your bank account number is mentioned in the bottom left – Star 4
- Your branch address and its identifier IFSC code is on the top (Star 2)
- Electronic clearing 9 digit MICR code is written in the bottom middle (Star 7)
- The current cheque number is just besides (on the left) the MICR code (star 6). In our example the cheque number is 000148.
- If you are issuing a cheque to a person for bank clearing, you must draw two oblique parallel lines with the words ‘Account Payee Only’ on the top left hand corner. This will enforce that the cheque can only be encashed in the account of the payee whose name is written on the cheque.
- And most importantly your Signature – just below the amount field.
Safe guards while using a cheque
As you may have noticed, a cheque is an instrument used to transfer your money from your account to another. If misused, this may result in your hard earned money being transferred to an unintended recipient with limited recourse. In this section we will highlight a few tips to prevent common fraudulent practices
1. Note the Cheque Number
If you issue a cheque to a person and want to recall it back, you must know which cheque number it was so that you can instruct your banker to put a stop payment instruction on that specific cheque. If you don’t recollect the specific number, you may have to put a stop payment on ALL cheque numbers issued till date or guess the cheque number. This may put you in grave inconvenience if some of the cheques are genuinely issued, e.g. towards loan payments or other bill payments and will have adverse consequences if the payment gets rejected. To prevent this, each cheque book has 2-3 pages just in the front of the cheque book or in the rear end where you can make a note of the cheque numbers, whom they were issued to and amount. This can come very handy for both tracking a missing cheque, accounting purposes or putting a stop payment instruction. It is a minor effort, but you may benefit from it.
2. Back Your Cheque With Funds
Never issue a cheque which you know will not be honored by your banker owing to lack of funds. This can attract several legal actions and penalties. In addition, be assured that your bank will charge you for each bounced cheque. And not to mention the negative impact it impact it has on your financial good will. The smaller amount a cheque has, the more negative impact it has on your goodwill.
3. Open Dated Cheques
Always write a date on your cheque before issuing it. A cheque is valid only upto 3 months from the date written on the cheque. Providing an undated cheque to a person may create a hassle for you as this will give the recipient flexibility to bank it whenever he wants and for you to always keep your bank account funded. For example, if you issued a cheque without a date for Rs. 1 lac on 1 Jan 2013. The recipient can bank it even after a few years after putting the date before banking it. And if you have forgotten about that cheque and your account doesn’t have funds, you will be liable make good his damages + legal consequences + bank charges. If you have to provided an open dated cheque, e.g. to a bank as a part of home loan documents, keep a note of the cheque number so that you can track such cheques.
4. Empty Spaces in a Cheque
A cheque provides sufficient space to fill in the amount and payee section. You must follow the following tips while filling the cheque :
- Do not leave any gap between the start of the field and where you write. See Star 9 and 5 in the sample cheque image. For example, there is a gap between Rupees field and the word ‘Five’. Also there is a gap in the Amount in numbers field before the number ‘5000’. Nothing prevents a fraudulent person to modify 5000 to 55000 by just adding another ‘5’ before before ‘5000’ and also adding ‘Fifty’ before the word ‘Five Thousand’ to make it read ‘Fifty Five Thousand’. Hence in summary, start writing from extreme left hand side of the field. Same goes with the Payee name as well.
- It is a healthy practice to finish the amount in words with the words ‘Only’. In our example, you could write Five Thousand ONLY. This prevents a fraudulent person to modify it further saying Five Thousand and nine hundred. The amount in numbers could be slightly modified to make 5000 as 5900.
- Where possible, you could strike the empty space with a line. In our example you will notice Star 3 (red lines) which prevents any one to add any further information after the details entered by you.
5. Double Signatures
If you are writing a critical cheque and you want to be absolutely sure that your banker does not reject the payment owing to slight mismatch of your signatures, you may sign again just besides your signature so that the banker has additional comfort on your signature. However, the signatures should not be completely different as this will mostly likely be rejected.
6. White Space below the Cheque
Please do not write or sign in the white strip at the bottom of your cheque. This strip contains key information which is read by automated machines while clearing your cheques. If you write any thing on this strip, it is likely that the machine may not be able to read your cheque and could have a consequences of delayed clearance or rejection.
7. Safe Custody
Your cheque books must not be kept in easy accessibility of prying eyes. Where possible, keep them in lock and key. They are a gateway to your bank account and the chances of forgery and fraudulent transactions increases if a person has access to even a single cheque leaf. And annoyingly, you may not even be aware if a person sneaks out one cheque leaf from your cheque book !
8. Ink Used for Writing A Cheque
Whilst the chances are less, but you should avoid writing a cheque with a pen whose ink could be washed away or erased. There have been remote frauds which you could read on the internet where a special ink was used by a fraudster for preparing a cheque. This ink could be erased later on without leaving a mark on the cheque. To be on a safer end, we would suggest to use a ballpoint pen (also called as a ball pen or a biro) for filling and signing cheques.
9. Alteration of Cheques
This is very specific for India. Banks no longer accept any alteration on the cheques. Earlier if you had to alter say payee name or amount field, you could sign again near the alteration and the cheque was usable. But now the banks will reject such cheques presented for payment.
10. Blank Signed Cheques
This is a strict No-No. This is as simple as inviting some one to empty your bank account. This is mostly done by young professionals and NRI who leave a blank signed cheque book with their parents or with their brokers. You may not doubt your parents, but what if some one steals that cheque and fills it in their favour. You could rather add your parents as a joint holder to your account and give them signing authority instead of providing a blank sign cheque.
11. Crossing – Account Payee
This is an excellent safeguard (see Star 1 in the image above). By writing the words ‘Account Payee only’ in the between the crossed lines, you are instructing the bank that they must pay the amount only in the account of the payee mentioned in the cheque. For example, if you issue a cheque which is not crossed and it goes missing. Any person who finds the cheque could potentially encash the cheque by visiting the bank.
Cheques are a very important instrument and these basic safeguards can go a long way to ensure its safe usage. If any of you are aware of other safety tips, please do share it in the comments field of this article.