Question & Answer

Question: We have a customer who has a proprietorship account with us who half the time deposits checks payable to his business into his account, and the other half of the time wants us to cash them. Our policy says we do not cash checks for businesses, but he keeps insisting it's HIS business. Can you give us some help?

We've checked with some of the other banks in our area, and most of them-though their policy says they don't-their tellers do cash checks for corporation, partnership and proprietorship accounts.

Answer: We hate to answer a question with a question, but what is the reason for cashing a check payable to a corporation? Immediate availability or use of the funds? This can be accomplished by depositing the check and drawing against it immediately, in the form of a check written on the account and cashed.

If you think about it-the most common reason given for cashing a check payable to a business, is to hide funds-not have them show as income to the business.

Question: Why would a business person want to do that?

Answer: Most common reason- so they wouldn't have to pay taxes on the income.

Question: What's that called?

Answer: Tax evasion!

Are you willing to aid and abet tax evasion for your customer? Look at the phrase that appears on page two of the SAR instructions under 1(d)(iii) which states that you are obliged to report the transaction "?if the transaction has no business or apparent lawful purpose?" After discussing the situation with your BSA compliance officer, it may be that you will decide to file a SAR on a customer who insists on cashing checks payable to a business.

If you still aren't convinced that you should not cash these checks, check your Uniform Commercial Code. Section 3-307(b)(2) says, "If a negotiable instrument is made out to the represented "person" (which can be a corporation, partnership, etc.) a NOTICE OF BREACH EXISTS when: 1. the instrument is taken in payment of or as security for the fiduciary's personal debt; or 2. it is taken in a transaction known to be for the fiduciary's personal benefit (such as cashing); or 3. it is deposited into an account other than the represented "person's" account?" Plainly said-you can be liable to the partner(s), officers and/or stockholders for the amount of the encashment, if you cash a check payable to a business.

Copyright © 1996 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 6, No. 7, 5/96