Answer: There's no regulation that I know of -- but it's a poor practice. Although it's not yet an industry-standard security procedure, smart bankers only allow the "cash back" courtesy for personal (consumer) accounts.
Any account that was opened using a fictitious name statement (DBA) -- even if the person's true name is "tied" to it -- should require a separate, recordable transaction for cash.
An often-overlooked reason for this procedure is that sole proprietors don't have to furnish certain financial information to the IRS when filing income tax forms. SPs may use monthly bank statements as the source for determining taxable income. An SP who actually deposits a check for $10,000 received as payment for services -- and then takes "cash back" for $5,000 -- only has an entry in that month's bank statement for $5,000 in taxable income. There's no other, independent record that shows otherwise. If the IRS ever investigates the SP, it will cause your bank to produce a railroad boxcar full of records for its review.Bookkeepers, secretaries, business partners and spouses are also pretty handy about using "cash backs" as an embezzlement vehicle.Question: According to a recent court ruling, we know we are not to cash checks payable to the bank, except for those which are paying a debt to the bank.
The checks in question should be made payable to CASH. This may be a strange question, but if a customer brings in a check already made payable to the bank, would there be a problem with having him cross off the bank's name, writing in "CASH", and initial the change?
Answer: My initial reaction was that it is now an altered check, and you better NOT cash it! But my second thought is that if the maker is the presenter - that is to say it is drawn on my account, I wrote the check, I'm making the change, I'm initialing it, and I'm going to endorse the check and cash it - then I don't have TOO much of a problem with it. It would be good if you could educate your customers to make their checks payable to their own name, and then cash it by endorsing that same name to the back. But educating customers can be tough! Do you have counter checks? A better route might be to simply have your customer tear up the check payable to the bank in tiny, tiny pieces and write a counter check payable to himself, endorse it, and then cash it.
All that said - if the check was not written by the presenter, but was written by a different signer on the account, I'd tell the customer to go get a new check.
First published on BankersOnline.com 12/3/01