Protecting Yourself from Cheque Fraud

• September 2005

The incidence of cheque fraud has experienced a steady increase over the past several years. Many local companies have felt the full effect and inconvenience of having a cheque intercepted.

However, with a few simple precautions on behalf of the drawer of the cheque, the responsibility for the loss arising from the cheque being intercepted may fall directly on the responsible financial institution.

Cheques are a form of negotiable instrument, the use of which is governed by Federal Government legislation in the form of the Cheques Act 1986. A cheque remains the property of the drawer until such time that the cheque enters the possession of the payee.

With this in mind, we offer the following information on how to best protect your interests when using cheques.

In order to ensure compliance with the legislation, the drawer of a cheque needs to;

  • Correctly date the cheque;
  • Clearly write the name of the payee and sum to be paid, being sure not to leave any unnecessary or large spaces between words;
  • Sign the cheque and mark the cheque not negotiable by the inclusion of parallel lines embossed vertically across the cheque;
  • Ensure the words Account Payee Only are written on the face of the Cheque;
  • After writing the sum to be paid draw a solid line in the remaining space so as to ensure that no additional amount can be added.

By crossing the cheque as not negotiable the drawer ensures that only the name written as the payee is entitled to the proceeds of the cheque. Some Banks issue business cheques that have this requirement already printed on them and office stamps are also available.

Once the drawer has complied with all of the above formalities, a photocopy of the cheque should be made as a record of the payment. This is valuable evidence as the copy can be provided to your bank in the event of a dispute. This will provide confirmation of to whom the cheque was drawn, the amount to be paid and who authorised the cheque by their signature.

The effect of complying with all of the formalities under the legislation is to show whether the drawer has used due diligence in ensuring the security of the cheque. This is achieved by not enabling the cheque to be altered without the consent of the drawer. If an obvious discrepancy exists in the form of the cheque, a bank should not honour the cheque. It follows then, that any loss arising, as a result of the bank honouring a fraudulent cheque may be borne by the bank.

In our experience, the Banks have been willing in appropriate cases to accept responsibility for losses arising from this criminal activity. Obviously each case will turn on its own facts and circumstances and no general rule applies to all instances of fraud.

Should you have any queries relating to fraudulent cheques, please do not hesitate to contact us for further information.

This publication contains general information only. It is not provided as legal advice. Professional advice should be taken before any course of action is pursued, or any information herein relied upon.