Cheque Imaging and Truncation System (CITS) and related laws

K. Kanag-Isvaran 

A seminar on the Cheque Imaging and Truncation System (CITS) and New Banking Systems was held on 3 October at the Balmoral ballroom of the Kingsbury Hotel, Colombo. 

Organised by the Bar Association of Sri Lanka, in collaboration with the Sri Lanka Judges Institute and Clearing Association of Bankers, the seminar featured many distinguished members of the Judiciary, the banking sector and Attorneys-at-Law. K. Kanag-Isvaran, President’s Counsel delivered the seminar’s keynote address. 

Kanag-Isvaran provided the gathering with a detailed description of the history of the usage of cheques from the times of the Roman civilisation up to the modern era of banking. According to Kanag-Isvaran the usage of cheques first began in the Eastern Mediterranean during the first millennium and later migrated into Europe. 

“The unassuming simplicity of the modern cheque belies the centuries worth of legal and operational experimentation that have contributed to its transformation from a bill of exchange to its current form. When seen in this perspective it is easy to appreciate the immense contribution of the cheque towards the development of negotiable instruments, money transfer and banking as we recognise them today” stated Kanag-Isvaran during his address.

After an introduction and description of the CITS, the President’s Counsel further went on to give a brief explanation of the system of laws governing the banking industry and their fundamental role in the process of the CITS as well as new banking systems. Some excerpts from Kanag-Isvaran’s keynote speech are provided below.

In 1959 a standard for machine-readable characters (MICR) was agreed and patented in the US for use with cheques. This opened the way for the first automated reader/sorting machines for clearing cheques. As automation increased, the following years saw a dramatic change in the way in which cheques were handled and processed. 

Cheque volumes continued to grow; in the late 20th Century, cheques were the most popular non-cash method for making payments, with billions of them processed each year. Most countries saw cheque volumes peak in the late 1980s or early 1990s, after which electronic payment methods became more popular and the use of cheques declined.

From the mid-1990s, many countries enacted laws to allow for cheque truncation, in which a physical cheque is converted into electronic form for transmission to the paying bank or clearing-house. This eliminates the cumbersome physical presentation and saves time and processing costs.

In 2002, the Eurocheque system was phased out and replaced with domestic checking systems. Old Eurocheques could still be used, however they were now processed by national checking systems. At that time, a number of countries such as Germany took the opportunity to phase out the use of cheques altogether. As of 2010, many countries have either phased out the use of cheques altogether or signalled that they would do so in the future. 

In modern times, many central banks across the globe mandate Cheque Truncation System (CTS) and Automated Clearing house (ACH) processing within their respective geographies. However, even in the absence of regulatory mandates, many banks choose image based clearing for their cheque operations, as it leads to operational efficiencies, fraud control and preparedness for future regulations.

The Cheque Imaging and Truncation System is an image-based cheque clearing system, which replaced the physical cheque with electronic information, flowing throughout the clearing cycle. This process eliminated the actual cheque movement in cheque clearing and reduced the delays associated with the physical movement of cheques.

The Cheque Imaging and Truncation System is designed to accept physical cheques or images and MICR data of physical cheques by direct electronic transfer. Banks generate images of cheques for outward delivery and submit cheque data and images. As such, the physical movement of cheques is truncated at the point of image capture and hence, the paying bank will not receive a physical cheque during the entire clearing process. 

With the computerisation of the banks, and the increase in the volume of cheques it was no doubt imperative that the country moved in the direction of image clearing and truncation on Sri Lanka’s cheque clearing system.“

 

New regime for admissibility of evidence

The senior silk also detailed the existing legal regime relating to the admissibility of evidence in trial courts. He stated:

A specific legal regime for the admissibility in evidence of any data message, communication, electronic document or electronic record and transactions has been introduced in the Act by section 21 – ‘Rules Governing Evidence’ – which reads:

(1) Not withstanding anything to the contrary in the Evidence Ordinance or any other written law, the following provisions of this section shall be applicable for the purposes of this Act.

(2) Any information contained in a data message, or any electronic document, electronic record or other communication –

(a) Touching any fact in issue or relevant fact; and

(b) Compiled, received or obtained during the course of any business, trade or profession or other regularly conducted activity, shall be admissible in any proceedings: Provided that, direct oral evidence of such fact in issue or relevant fact if available, shall be admissible; and there is no reason to believe that the information contained in a data message, or any electronic document, electronic record or other communication is unreliable or inaccurate: Provided further that, for the purposes of paragraphs (a) and (b), if any information is contained in a data message, electronic document, electronic record or other communication made by a person-

(i) Who is dead or who by reason of his bodily or mental condition is unfit to attend as a witness; or

(ii) Who is outside Sri Lanka and where reasonable steps have been taken to find such person and he cannot be found; or

(iii)Who does not wish to give oral evidence through fear; or shall, if available, be admissible

(iv) Who is prevented from so giving evidence, evidence relating to such information. 

(3) The Courts shall, unless the contrary is proved, presume the truth of information contained in a data message, or in any electronic document or electronic record or other communication and in the case of any data message, electronic document, electronic record or other communication made by a person, that the data message, electronic document or electronic record or other communication was made by the person who is purported to have made it and similarly, shall presume the genuineness of any electronic signature or distinctive identification mark therein.

The “Interpretation” section of the Act gives the several terms used in the Act their definition. Thus section 26 defines all the terms used in the Act as, “unless the context otherwise requires”. It does not define them as “means”, giving a little flexibility in interpretation. To name a few of the terms, mention may be made of, “communication’, “data message”, “electronic”, “electronic document”, “electronic record”, “electronic signature”, “information” “information system”, and “net service provider”.

One matter of significance is that section 22 of the Act excludes the application of the Evidence (Special Provisions) Act No. 14 of 1995 which was enacted to provide for the admissibility of audio visual recordings, and of information contained in statements produced by computers in civil and criminal proceedings by declaring:

“Nothing contained in the Evidence (Special Provisions) Act, No. 14 of 1995 shall apply to and in relation to any data message, electronic document, electronic record or other document to which the provisions of this Act applies.”

Thereby ringing the death knell for this Act. It might as well be repealed!

May I be permitted to recommend that a thorough knowledge and mastery of Electronic Transactions Act No. 19 of 2006, the provisions in the Evidence Ordinance relating to “bankers’ books” and “certified copy” – section 90A, as amended by Act No. 29 of 2005, and the informed use of several pre-trial tools in the Civil Procedure Code relating to discovery, inspection, admission of genuineness, interrogatories etc., is imperative and should be put to the yolk to meet the challenges of truncation, electronic imaging and dematerialisation in general.