The Canadian Payments Association board of directors on Monday issued an official policy statement advising that the clearing system rules will be amended to prohibit the clearing of tele-cheques effective Jan. 1, 2004.

The prohibition is a proactive measure to address the heightened risk of fraud associated with this type of item.

A relatively recent development in Canada, a tele-cheque has the same physical appearance as a regular cheque, but it is not signed by the person from whose account the funds are to be drawn. Rather, the item is created by a third party (usually the party that will receive the funds) using cheque-creation software, after purportedly obtaining the account holder’s account information and authorization over the telephone or, in some instances, the Internet.

The prohibition of tele-cheques in the clearing system reflects a concern that unauthorized parties could use this vehicle to gain access to deposit accounts fraudulently. Since this type of payment item is not signed by the account holder, nor is it supported by any other form of written authorization, there is no practical means for the account holder’s financial institution to verify whether the payment has been properly authorized.

Information provided by CPA member financial institutions suggests that tele-cheques are currently in limited use in Canada. Although the CPA is not aware of any fraudulent use of these items to date in Canada, the CPA Board has concluded that the inability to verify authorization of these items creates an unacceptable level of risk for both account holders and financial institutions. In taking this step, the CPA is acting in accordance with its public policy objectives to ensure the safety and soundness of the clearing and settlement system and to take into account the interests of payment system users.

“Our consultations with business and consumer representatives, government bodies and financial institutions found a general view that the ability to verify authorization of payments is absolutely key to mitigating risk for transactions initiated over the Internet or other remote channels,” commented CPA president and CEO Guy Legault. “Consequently, to support the introduction of new payment options in those environments, authorization requirements will be a pillar of a broader policy framework now under development.”

Implementing the prohibition on tele-cheques on January 1, 2004 will allow sufficient time for the necessary CPA rule amendments to be put in place and for organizations that may currently be using tele-cheques to explore alternatives. As an interim safeguard until the new policy comes into effect, the CPA Board has adopted a provision giving account holders up to 180 days to report any unauthorized tele-cheque, sign a declaration and have the funds restored to their account.