BANKING AND FINANCE LAW UPDATE: ELECTRONIC CLEARANCE OF CHEQUES (BILLS OF EXCHANGE) UNDER THE TANZANIA AUTOMATED CLEARING HOUSE RULES, 2015.
- The Rules replace manual clearance and introduce electronic clearance of bills of exchange.
- Time for clearance of bills of exchange reduced to one day.
- The roles of the Clearing and Collecting Banks vis-à-vis the drawers and beneficiaries.
A bill of exchange is defined under Section 3 (1) of the Bills of Exchange Act, [CAP 215 R.E. 2002] as an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer. Bills of exchange include promissory notes and cheques.
Initially clearance of bills of exchange was done manually. Prior to the enactment of the Tanzania Automated Clearing House Rules, 2015 (‘the Rules’), clearance of bills of exchange was done through regional clearing houses across the country. The clearance houses had their own set of Rules that governed their operation. The Bank of Tanzania in 2002 introduced an electronic clearance house in Dar es Salaam which later spread to BOT zonal offices at Mbeya, Arusha, Dodoma and Mwanza. This system was not used by all banks, hence became inefficient. Thus, it necessitated the enactment of comprehensive set of rules which would govern all banks.
For the business and investment world, a faster and secure system for clearance of bills of exchange is important. The business industry has been faced with many problems regarding fraud on cheques, breach of contracts based on cheque dishonoring on contractual payments and so forth. Banks have been found to be lax and negligent on ensuring drawers’ accounts safety and many a persons have been victims of frauds by unscrupulous people and also negligent financial institutions. The enactment of the Rules paved way for an advanced and safer electronic clearance of bills of exchange. The Banking and Finance and Commercial Department of Breakthrough Attorneys highlights the contents of the Rules for general public awareness and interested stakeholders regarding the safeguards for their funds in financial institutions and the rights therefrom.
2.0 Cheque Clearance Procedure; Tanzania Automated Clearing House (TACH)
Following technological advancements and contemporary business dynamics, previous clearing houses were deemed inefficient. The growing need to have a clearing mechanism to cater for the changes in payment systems necessitated the implementation of the Tanzania Automated Clearing House (TACH).
TACH is an electronic clearing system that processes in real time by sending images instead of physical cheques. TACH became operational in May 2015 following the enactment of the Rules. TACH aimed at increasing efficiency in effecting payments in a timely manner and it seeks to enhance security and efficiency of interbank clearing operations.
TACH performs clearing operations based on the data and electronic cheque’ images submitted by member banks. The clearing process has adopted cheque standards that conform to imaging and security requirements to ensure that images contain essential information and are useable and legible as detailed herein.
3.0 Collecting and Clearing Banks and their Duties
Generally, both collecting banks and clearance banks have to act with diligence in the clearance of bills of exchange. Failure to exercise diligence in clearance of bills of exchange renders the bank liable.
Maybe it is imperative at this juncture to explain what a Clearing Bank is and what a Collecting Bank is.
A clearing or paying bank is a bank that that honors a payment instruction directed to it by its customer. That is, A bank that is responsible for paying the amount of money on a cheque relating to one of its customer’s accounts. In summary, a payer’s Bank
|A collecting bank is a bank that collects value for cheques or other debit instruments from other banks on behalf of its customers. It is the banks that receives the cheque physically and converts it money to the one who presents it, that is, collects money from the account of the writer of a cheque on behalf of the person who has deposited the cheque into the bank. In summary, a Payee’s bank.|
For example; X banks with DRC Bank and maintains a Cheque Book on that Account with DRC Bank. Based on a contract X pays Y through a cheque. Y presents the cheque to his Bank, Bank ZTO.
Bank ZTO will need to send the cheque to DRC Bank for clearing and payment. When DRC Bank clears the authenticity and validity of the cheque, it will release the amount (pay) to Bank ZTO in Y’s account. In essence Bank ZTO collects funds on behalf of Y, the payee (the drawee of the cheque and/or beneficiary on endorsement). And DRC Bank clears and pays funds on behalf of the Payer (writer of the cheque)
It is imperative to note that the said banks, are obligated to adhere to a set of duties set under the law. The duty to act with diligence on the part of clearance and collecting banks is inferred from the following general legislation (we will review the specific duties from TACH Rules in the later instance):
3.1 Anti-Money Laundering Act No.12 of 2006
Section 15 (1) (a) of the Act provides that it is the duty of a reporting person to;
“Take reasonable measures to satisfy himself as to the true identity of any applicant seeking to enter into business relationship with him or to carry out a transaction or series of transactions with him, by requiring the applicant to produce an official record reasonably capable of establishing the true identity of the applicant.
The term ‘reporting person’ is defined under Section 3 in the Act to include banks and financial institutions. Therefore, the Courts used this provision to highlight the level of diligence required for banks when performing transactions.
3.2 The Bills of Exchange Act (Cap 215 R.E. 2002)
The Clearing bank is protected for making payment on the bill in good faith. This is protection is provided for under Section 60(1) of the Act, which provides:
“ When a bill payable to order on demand is drawn on a banker, and the banker on whom it is drawn pays the bill in good faith and in the ordinary course of business, it is not incumbent on the banker to show that the endorsement of the payee or any subsequent endorsement was made by or under the authority of the person whose endorsement it purports to be, and the bank is deemed to have paid the bill in due course, although that endorsement has been forged or made without authority.”
The protection under the above provision extends to the bank when the same has acted in good faith and in the ordinary course of business. However, in interpretation of that provision by the High Court of Tanzania (Commercial Division) in the case of National Oil Tanzania Ltd versus The National Bank of Commerce Ltd and Standard Chartered Bank (T) Ltd, Commercial case No. 10 of 2005; the Court stated that such protection of the banks did not apply where there was negligence on the part of the bank.
4.0 Specific Duties of Clearing and Collecting Banks
4.1 Duties of a Collecting Banks under the TACH Rules
The duties of a collecting bank are stipulated under Part IV of the TACH Rules to include:
4.1.1 Perform physical checks to ensure validity of the information on the cheques.
4.1.2 Confirm that the details on the cheques have not been tampered with.
4.1.3 Ensure that the cheques have met all specification requirements.
4.1.4 Ensure beneficiaries of cheques are those intended by the drawer.
4.1.5 Maintain an archive of cheques.
4.2 Duties of Clearing/Paying Banks under the TACH Rules
Under the Rules, duties of a clearing bank include;
4.2.1 Perform checks on the images presented to them by the collecting banks.
4.2.2 Counter-check the validity of payment details.
4.2.3 Perform verification of account mandates.
4.2.4 Advise on the fate of all cheques presented by the collecting bank.
4.2.5 Maintain archives on collected images of cheques as provided under the Anti-Money Laundering Framework.
It is observed that when there are material issues wrong/amiss with the presented Bills, the Clearing bank is expected to align with the Drawer of the Bill whether the said material issues should be overlooked or not. It is our experts’ position that at this juncture, the Bank’s liability as regards to negligence is born.
The introduction of the Rules has revolutionized payment through bills of exchange in Tanzania. Prior to the enactment of the Rules, clearance of cheques between banks could take up to 28 days. With the introduction of the Rules, the time within which clearance is done has been reduced to one day.
The TACH Rules are significant towards alignment with technological advancements that continue to happen in the financial sector. Such technological advancements have, on the other hand, mitigated security risks especially to online transactions, in terms of fraud and negligence. On the other hand, the clear delineated duties between a Clearing and Collecting Bank have assisted into apportioning banks’ liabilities and in return ensuring a high standard service to users.
For this reason, the Rules are vital to govern clearance transactions with a view of minimizing fraud and increase of efficiency in interbank payments involving bills of exchange. Breakthrough Attorneys, commends the Bank of Tanzania for promulgation of the Rules in a view of regulating clearance transactions involving bills of exchange.
This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.