Although it is against our policy, we have had a banking center giving cash back on deposits and cashing checks for a commercial deposit customer. Besides being a VERY bad practice, are there any regulations, laws, circulars or interpretations that cover this issue? Our attorney has asked me if the FRB, OCC or FDIC has issued any thing. I haven’t been able to find a thing. Appreciate the help.

To my knowledge, there is no law or regulation that says you can't give cash back on a deposit or cash checks payable to a business. As you said it is a VERY BAD idea because of the possibility of embezzlement, fraud, and tax evasion. While it is not a violation of law or regulation, the potential liabilities are great.

With that said, I know that most every branch has at least one "Mom & Pop" business customer that has done this for the past 50 years.

There has been so much discussion on this topic, I hate to repeat it over again. Please go to the "Search" box in the top left corner of www.bankersonline.com (the home page) and use the key words "cashing business checks." You will find numerous Q&A's, articles, etc. on this topic.

In short, there is no regulation preventing this, but when the IRS pulls you in for aiding tax evasion you will know that you did wrong.

Actually, you will find that the corporate resolution that you have in your file most likely does not authorize anyone to cash checks - only make deposits and write checks. If you are going to cash checks for a corporation, make sure you have a corporate resolution that addresses it. Otherwise, if someone is embezzling - the bank can be held liable for the amount of the cash checks.

My advice is simply not to do it. That said, getting tellers to comply is a different issue! The best thing to do if the business insists on cash back is to have an authorized signer on the business account write a check for cash. While this is not great either, it's the best alternative we've been able to come up with.

Richard is right, this question has been asked many times, but here is one answer that I am sure would spark debate if this horse had not already been beaten to death....

The cashing of checks made payable to a corporation has not been an accepted business practice, probably for security reasons. The UCC does not specifically address the issue, but the book Teller World, by Paul F. Jannott, states on page 104, "Checks payable to corporations of businesses should never be cashed by a teller, but rather accepted only for deposit to the corporations' or businesses' account."

The UCC may not address the issue specifically, but § 3-307(b)(2) indicates that cashing a check payable to a business puts you on notice of the fiducary's breach of duty. And once the bank is on notice of a breach, the bank is liable for any breach that it facilitates.

I guess this horse has been resurrected.

I think you will agree that your answer is incorrect or at least inaccurate to the situation at hand, i.e., depositing a corporate check and giving cash back.

UCC Section 3-307 uses the word "knowledge" not "notice." Knowledge is defined in Section 1-201(25). Knowledge of the organization is determined by the rule stated in 1-201(27). In most cases, the taker of the instrument on behalf of the organization has no knowldge of any fiduciary status of the person from whom the instrument is received. In such cases, 3-307 does not apply because, under 1-201(27), knowledge of the organization is determined by the knowledge of the "individual conducting the transaction." Furthermore, 3-307(b)(2) requires that the person acting for the organization have "knowledge" of facts that indicate a breach of fiduciary duty. Typically, the person acting on behalf of the organization does not have such knowledge.

The original question in this thread did not involve a breach of fiduciary duty which the person acting for the taking organization had "knowledge." The question asked about the prohibition of depositing a business check and giving cash back--it is assumed that the person asking the question was asking about transactions where the teller does not have knowledge of a breach of fiduciary duty.

If the teller gives cash back "without knowledge of a breach or fiduciary duty," then Section 3-307 does not apply. There must be knowledge for it to apply.

Change the facts a bit and Section 3-307 would apply. If the teller had knowledge of the fiduciary status and the breach thereof, then the organization has knowledge. And Section 3-307 would apply.

Section 3.307 is very limited in its application. It just simply is not a prohibition of the practice asked about-nor does it apply to it--unless the knowledge stated above exists.

Perhaps I do not dismount as quickly as others.

***RANT WARNING***

I am neither a lawyer nor a judge, but I interpret the definition of Fiducary in 3-307(a)(1)(...or other representative owing a fiduciary duty with respect to an instrument) to provide all of the knowledge that the teller needs. Even if that person's duty is nothing more than getting the check to the bank and into the payee's account. By my understanding, that covers the 'knowledge' required in 3-307(b)(ii). 'Notice' to the person with 'knowledge' takes place in 3-307(b)(2).

Perhaps I am taking a hard stance on this, and if I am guilty of anything, it is erring on the side of caution. If you (or anyone else) know of any case law that pertains to this scenario, I would be very interested in seeing it.

Honestly, I am just as much interested as everyone else in this dead horse staying dead. And that is why I provided a cite which I feel is relevant. I think we all agree that paying cash on checks payable to businesses is a bad idea, and tax evasion and embezzlement frequently enter the discussion. But I have found the 'why' of this question to be more difficult than most other teller issues. It's easy to tell branch staff that the regs say we MUST give this disclosure, or we CANNOT hold that check more than xx days, or this information is REQUIRED for a CTR. Such being the case, I find it helpful to inform the branches that WE become liable if the person at the counter is doing something fishy. Will 3-307 always apply?- No. Will 3-307 ever apply?- Yes. Do I want my tellers making that distinction at the time of transaction?- No.

I think we can all say it together: Don't allow a corporate check to be cashed with cash back to the depositor!

That being agreed, we are having difficulty determining the legal reasoning for this. I believe that is because it is just a generally accepted practice, not a legal requirement.

UCC 3-307 will place responsibility on the institution if the teller has knowledge of both: 1) the fiduciary status of the fiduciary, and 2) that the fiduciary's claim to the cash back is a breach of the fiduciary duty. UCC 1.201 (25) defines knowledge as actual knowledge. So, for the institution to have liability under 3-307, the fiduciary would have to tell the teller that he/she is breaching his/her fiduciary duty. Or the teller would have to have actual knowledge from some other source that the fiduciary is breaching the fiduciary duty.

So, if you have an honest teller give cash back, the bank will not have liability if the fiduciary breaches his fiduciary duty. An honest teller would not have knowledge of the breach; therefore, the bank would have no liability under 3-307.

If you have a dishonest teller who gives cash back knowing that there is a fiduciary duty and that it is being breached--then the bank has liability under 3-307 because the knowledge is imputed to the institution.

So, to prevent this liability, what do you do? Initiate a policy? What will the policy say? Will it say: "No Cash Back On Corporate Checks?"

But this is worthless and no protection against institutional liability under 3-307. If you have a dishonest teller who is going to assist a fiduciary in breaching a fiduciary duty, do you really think that a policy is going to stop her/him from giving cash back? The teller will break the policy, give the cash back with knowledge that it is a breach of the fiduciary duty, and subject the bank to liability under 3-307.

Further, if you establish a policy and have an honest teller--who is a slow learner-- give cash back, your bank still has no liability under 3-307.

This section of the UCC just is not a reason that a bank can't give cash back on a corporate check. In fact, under 3-307, the bank can give cash back without liability if its tellers do not have the requisite knowledge set out above.

As far as legal authority for this discussion. It is not merely my opinion, but the opinion of the drafters of the UCC. I found the basis for my discussion in the official Uniform Commercial Code Comments(See Comment 2 to 3-307). It may not have the weight of case law, but it is often relied on by courts in interpreting the UCC.

A few things:
-I am having a hard time finding the UCC Commentary- could you point me in the right direction?
-I can see the point regarding the teller needing to KNOW what the cash is for. Of course, some transactions may reveal this (if the fiduciary then deposits the cash to their personal account, buys a bank check payable to him/herself, etc.)
-I guess the scenario that concerns me more than the slow learner is the sharp teller that DOES know something isn't right. The teller doesn't allow the cash back transaction, the customer complains, then the manager comes back to the teller with "Widgets and Gidgets is a good commercial customer, and we're going to do this for them." All of us who have been tellers have been given orders at some time that we knew were just not right, and this is where a policy that puts the brakes on the manager's decision is effective.

In the scenario where your knowing teller asks for manager approval, what is there to stop the teller from just giving the fiduciary cash back without asking a manager. And then later just saying oops! With a knowing teller, the bank is on the hook regardless of whether he asks a manager for permission or not. I guess if he asks a manager, when it comes out that it was a breach of fiduciary duty, the teller deflects suspicion by saying, "but I followed the book and got approval."

I do not know where online you can get the UCC with commentary, but I don't see how folks live without the commentary. Maybe someone else knows where to find it. I know where you can buy a disk--but it will be the uniform code with commentary--and will not contain any non-uniform amendments your state may have adopted. So, you would have to compare it to your state's adopted code. In Texas, the State Bar also has commentary. West Publishing surely publishes something for your state--with commentary. I'd seek it out.

West Publishing probably sells a paperback UCC with commentary for your specific state 800-328-4880.

Thanks for the info.

Regarding my teller/manager scenario- I think you may have misread it. The teller is not going to the manager for approval. The teller is knowing and doing the right thing, and is later 'overridden' by the manager, who allows the transaction to happen after the customer raises a fuss.

If the teller gave the cash back with knowledge of the breach, then the institution is liable under 3-307. This is true even if the teller tried to originally do the right thing and was overridden by a manager. No policy is ironclad--even with a policy in place, this could happen.

I am digging this dead horse up again. Please help me. I want to stop cashing checks made payable to a business and am having a hard time with upper management. If we hae a corporate resolution and it states Endorese checks and orders for the payment of money or otherwise withdraw or transfer funds on deopsit with this financial institution, does this give the person named the right to cash checks made payable to the corporation?

No. It says I can:
1) endorse checks payable to the company,
2) write checks on the company's account and
3) transfer funds from the company's account.

For me to make it say something else I would have to want it to say something else and torture the language with some persistence. Any resolution should say exactly what powers were granted; there should not be any room for interpretation.

If they want to empower someone to cash checks payable to the business, then that is exactly what the resolution should say. From there, your concern would be to assure that the resolution was certified by the corporate secretary as being reflective of the minutes of an appropriately called meeting of the board. (Knowing that, you should not buy any stock in the company or loan them any money.)

I wish I had the "magic bullet" for this issue, I would use it. However, some banks will only accept advice on this point after they have incurred a loss.

Could not have said it better myself. There is no magic bullet. Banks should not do this, but they continue to do so. At that point it is not so much a compliance question as it is a risk vs. reward question. And no one here can answer that question for your institution. They can merely relate what they have done and why. Corporate resolutions aside, I say banks should not do this.

The only other thing you could present to your board would be an unscientific poll. So, I will post one post haste.

Post deleted by Grist

I don't think this applies to businesses as it states, "acting in a fiduciary capacity for any person, trust, or estate." A Business is not a person, trust or estate.

Out of curiosity and because it is too late and I am too tired to read your entire post...are you saying it is okay but not good practice if they are an authorized signer and according to this information fiduciary is intepreted to include officers of corporations and others acting in a fiduciary capacity (signers who are not officers of the corp?). If so doesn't this still fall back to the corp resolution and whether that person has the specific authority.

We all agree this is bad practice and we all agree that it will continue to be done..however, getting back to the basic risk - giving cash back or cashing checks if the corp is wholly owned by the person transacting would not be so tragic. As pointed out, if authorized and/or acting in a fiduciary capacity what is the problem? However, if cash is given to an employee of the corporation who is making the deposit, and they are not authorized by corp resolution things could get ugly...So is this really a blanket do it or not issue?

You are probably correct, so that post to out of here! Thanks.

Cashing checks and cash back on corporate activity is ugly and I don't think, after re-reading fiduciary parameters as posted, that business entities are covered, so that post is gone to reduce confusion - on the other hand I don't know of any law that specifically states that you cannot cash a check payable to a corporate entity if presented by an authorized signer or give that signer cash back.

Of course, the supporting corporate resolution may or may not specifically address these issues. It's just bad practice, but sometimes years of practice cannot logically be used to support a statement that something must or should not be done.

Don't forget that in this day and age of heightened awareness of Anti-Money Laundering, the cashing of business checks will probably be viewed as a high risk activity.

A colleague told me after receiving a few subpoena's from the IRS for copies of checks CASHED (or where Cash-back was received) by a couple of businesses for a 2 year period, her bank put a STOP to the practice.

Think about this issue in light of USA PATRIOT, Anti-Money Laundering, BSA, etc., - does any bank want the obligation of researching that activity?

Check out the General Discussion thread for a poll on this very subject. Thanks.