Banks on second-endorsed
checks; accept or not?
The check in the name of one person, yet cashed or deposited
into the account of another, second endorsement can be used for
various fraudulent schemes generally do not end well for either the
bank or the holder of the original checking account. With that, some
banks have adopted internal policies which disallow outright
acceptance of these checks. However, banks must still accept second
or further endorsed checks because; (1) such transaction is still
accepted in the status quo; and; (2) certain circulars and laws are
provided to set parameters in regards to such transaction.
As a general rule, the Bank shall only accept checks which are
payable to depositors for deposit to their respective accounts.
Occasionally, some depositors present checks payable to other payees
which they would like to deposit to their accounts. Second-endorsed
checks are checks which are presented for payment not by the payees
but by subsequent holders to whom the checks were endorsed by the
payees. There are three types of second endorsed check; (1)Second-
endorsed Non-crossed check which refers to a check without any two
parallel lines on the upper left corner of the face of the check being
deposited to an account other than the payee; (2)Second-endorsed
ordinary crossed check refers to a second-endorsed check with two
parallel lines on the upper left corner on the face of the check and
without the stamp “For Payee’s Account Only” or “For Deposit to
Payee’s Account Only”; and (3) Second-endorsed check with
restrictions refers toa second-endorsed check with two parallel lines
on the upper left corner on the face of the check and with a stamp
“For Payee’s Account Only” or “For Deposit to Payee’s Account Only”.
In the first claim that such transaction is still accepted in the
status quo, Amended Guidelines on the Acceptance of Second-
Endorsed checks provides, that bank shall ensure that all eligibility
requirements are fully met and complied with prior to the approval of
the acceptance of second-endorsed checks. In the acceptance of it,
bank shall ensure that they are not being used as intermediary for
money laundering or other illegal activities. Therefore, it is not true
that banks no longer accept second or further endorsement of checks.
Banks can adopt risk safeguards which may have to be maintained.
Second, circulars and laws are provided to set parameters in
regards to such transaction. Bangko Sentral in a 2002 Circular Letter
advised as follows: “Banks should limit the acceptance of second-
endorsed checks from properly identified clients and only after
establishing that the nature of the business of said client justifies or at
least, makes practical the deposit of second-endorsed checks. In case
of isolated transactions involving deposits of second-endorsed checks
by clients who are not engaged in trade or business, the identity or
the first endorser should be established and the record of the
identification shall also be kept for five years. It is also understood
that banks shall at all times follow the Know-Your-Customer (KYC)
rules whenever they handle or transacts second-endorsement
checks.” The above-mentioned Circular Letter was supplemented by a
2004 Circular Letter which enjoined banks “to take the necessary
precaution in accepting deposit of second-endorsed dividend checks,
especially those in unusually large volume. Banks should examine
thoroughly dividend checks with particular attention to the payee’s
endorsement.”
In addition, second-endorsement checks are not prohibited by
law, as in fact, it is still a recognized transaction under the Negotiable
Instrument Law. Thus, acceptance by banks of second-endorsed
checks is not illegal.
Moreover, under Section 66 of the Negotiable Instruments Law,
an endorser warrants “that the instrument is genuine and in all
respects what it purports to be; that he has good title to it; that all
prior parties had capacity to contract; and that the instrument is at
the time of his endorsement valid and subsisting.” However, in the
case of BDO Unibank Inc vs Lao, it has been repeatedly held that in
check transactions, the collecting bank generally suffers the loss
because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of endorsements considering
that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. If any of the
warranties made by the collecting bank turns out to be false, then the
drawee bank may recover from it up to the amount of the check. This
is because once the collecting bank sends the check for clearing, it is
required, under clearing rules, to warrant the genuineness of all prior
signatures appearing on the check. Therefore, the bank must adopt
strict guidelines in implementing the acceptance of the said check.
In conclusion, it is still acknowledged that banks may accept it
provided that certain requirements were accomplished. It further
gives stricter guidelines to ensure the impossibility of fraudulent acts
towards second endorsed checks. Additional parameters for the bank
were given to acknowledge and avoid future circumstance of the
instrument mentioned. Banks may not immediately accept or process
the check but it does not mean that banks should no longer accept it.
