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The Green Sheet

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Remote Deposit Capture Legal & Risk Concerns

Legal & Risk Concerns


It is important to note that since the Check 21 legislation has only recently been passed, and Remote Deposit Capture solutions are only just beginning to hit the market, there is much yet to be determined as to legal cases to set precedent, etc.

The below information is provided as information only and is not intended to be legal advice, but rather topics which we encourage you to discuss with qualified legal and other experts. Please see our Disclaimer page for our legal disclaimers.


New Legislation, New Risks & Liabilities


The Check 21 legislation enables a whole new way for USD checks drawn on a bank in the USA to be processed and cleared. Quite simply, the Check 21 legislation allows for Substitute Checks, aka, Image Replacement Documents (IRDs). Most RDC Agreements address at least the following:

Interestingly, Check 21 does not directly address image exchange or image-based clearing. Participants in an image exchange / clearing relationship should therefore also have agreements between themselves to address (but not limited to) the following:
 

Image Quality
Detailed image quality standards have not yet been set by the industry and are not addressed in the Check 21 legislation. Unless covered in a separate legal agreement between clearing parties, and party in the clearing process can return an item due to inadequate image quality.

Warranties Against Item Replication
Any party which converts an original paper item into an image or IRD must warrant against presenting that item more than once.

Fraud
As per the Check 21 legislation, it appears that, in the event a fraudulent item (for example, an item where the original dollar amount was $10, but was altered to show $100) is cleared as an image or IRD, but the loss could have been prevented had the original item been presented for clearing, the party that truncated the original item may be liable.

Consequential Damages
It appears that, in all the above mentioned instances, the party which truncates or converts the original item may be liable for "consequential" damages. If this is true, this may be a major concern for both banks and users of RDC solutions.


Legal Agreements & Industry Trends


The industry trend for legal agreements required by RDC solution providers is to "push" as much of the risk and liability as possible onto the end user of the RDC solution. In other words, a bank providing an RDC solution to a corporation would require the corporation to be responsible for all the above mentioned risks and liabilities.

Solution Functionality Can Help Mitigate Your Risk

As an end user accepting these risks and liabilities, a key point to consider might be what functionality and risk mitigation tools are at your disposal to address the liabilities you will likely be responsible for? Some key features of an RDC Solution which can help mitigate risk should include:
 

  • Item Replication Detection - The ability for the RDC Solution to detect if a single item has been deposited multiple times.
  • Image Quality Analysis and Usability tests at the point of capture - These features help identify if an image meets certain requirements for clearing and can help ensure items are not returned due to image problems.
  • MICR Detection - One of the leading indicators of a fraudulent check is the lack of MICR (Magnetic Ink Character Recognition) ink, and alternatively, if the entire check is printed in MICR.
  • Field Permission Capabilities - Preventing the end-user from editing / entering the information contained on a check's MICR line can help prevent clearing mistakes / fraud.
  • Mulit-Level and Multi-User Security Levels - This functionality can ensure the person who scans and prepares the deposit is not also the same person who reviews, approves and transmits the deposit the the bank.
  • Audit Trail Logging - The ability to track every action performed on the system, including rescans, edits, deleted items, user sessions and more.
  • Aggregate Reporting Capabilities - The ability to view all of an organization's RDC activities and monitor items, users and deposits across the organization

 



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