CIP/ID Requirements for Payees of Checks (RDC)

Question:

Business using RDC to deposit checks that it issues to and cashes for non-employee service providers. We bank a local recycling service. Historically, this customer has paid individuals who bring in scrap metal in cash. However, their regulators are now pressuring them to issue these individuals checks in lieu of cash payments. Our customer would like to issue these checks, immediately exchange them for cash and then deposit these checks via RDC. I understand that Fincen issued guidance (FIN 2006-G005) indicating that this activity is not considered MSB activity even in cases where the dollar amount is over $1,000, for one person and in one day. I would consider the overall risk of this activity to be low given that our customer is writing, cashing and depositing only their own checks and therefore disputes are unlikely and would only lead back to our customer. I am wondering if there are any requirements that the bank needs to enforce on our customer regarding this activity, such as CIP / ID requirements for the payees of these checks. I imagine that the individuals who are collecting scrap and turning it in for payment may be at a higher risk for ID problems, either lack thereof or forged / altered. Is this the banks concern?

Answer:

I'm intrigued. Other than environmental agencies, I have no knowledge of any regulatory agency for recycling operations.

Regardless, if the goal is to add an additional step in what remains a primarily "cash" transaction, then issuing the check is a complete waste of time for the recycler (and law enforcement) unless the recycler identifies and records the identification of its payee prior to cashing the check. Obviously, recording that identifying information on the back of the check would leave them the best paper trail.

You could add a requirement to your RDC agreement that they record the identification on the backs of the checks they cash that are drawn on their account and payable to individuals. I am reluctant to suggest that because they are the regulated party in this instance, not your bank; it is not up to you to assure they are adhering to some general guidance they have been offered as opposed to a legal requirement. (However, if there is ever an investigation of their activity you may wish you had done it.)

You are focusing on what I believe to be the correct issues. First, does this activity make them an MSB. Second, does the depositing of their own checks affect your risk levels. I agree with your conclusions on each.

First published on BankersOnline.com 11/26/12