[Federal Register Volume 62, Number 104 (Friday, May 30, 1997)]
[Proposed Rules]
[Pages 29314-29317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14174]


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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 240

RIN 1510-AA45


Indorsement and Payment of Checks Drawn on the United States 
Treasury

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Proposed Rule.

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SUMMARY: This reissues an earlier proposed revision of 31 CFR part 240, 
which governs the indorsement and payment of checks drawn on the United 
States Treasury. The purpose of this reissuance is to announce that it 
is Treasury's intention to supersede existing Federal common law 
regarding the apportionment of risk between Treasury and presenting 
banks with respect to certain materially defective Treasury checks, 
including counterfeits. Procedural changes are intended both to fix the 
time by which Treasury can decline payment on Treasury checks and to 
provide financial institutions with a date certain for final payment. 
These rules also provide greater clarity by defining previously 
undefined terms and by ensuring symmetry with current Treasury 
regulations governing Federal payments utilizing the Automated Clearing 
House method. In addition, these rules provide that Treasury may 
instruct Federal Reserve Banks to intercept and return, unpaid, benefit 
payment checks issued to deceased

[[Page 29315]]

payees. These proposed revisions are issued in response to concerns 
raised by financial institutions, Federal agencies, and other affected 
parties.

DATES: Comments must be submitted on or before July 29, 1997.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Ronald Brooks, Senior Program Analyst, Financial 
Processing Division, Financial Management Service, Prince Georges 
Center II Building, 3700 East-West Highway, Room 725-D, Hyattsville, 
Maryland 20782. Comments may be faxed to (202) 874-7534.

FOR FURTHER INFORMATION CONTACT: Ronald Brooks, (202) 874-7620 (Senior 
Program Analyst, Financial Processing Division); Paul M. Curran, (202) 
874-6680 (Principal Attorney).

SUPPLEMENTARY INFORMATION:

Limitations on Payment

    The current regulation provides that Treasury shall have the right 
to conduct first examination of Treasury checks presented for payment, 
and to refuse payment of any checks within a reasonable time. The 
current regulation also provides that such checks shall be deemed paid 
only upon Treasury's completion of first examination. The proposed rule 
clarifies this in two ways.
    First, it defines first examination, and defines material defects 
or alterations as including counterfeit checks. These definitions are 
consistent with Treasury's longstanding interpretation of these terms.
    Second, it fixes and narrows the time by which Treasury must 
complete first examination, and provides that if Treasury fails to do 
so within 150 days, the check will be deemed paid. This proposed change 
is intended to accommodate financial institutions which seek not only a 
more compressed time frame for first examination but also a date 
certain for final payment of Treasury checks.
    While Treasury will, in most cases, complete first examination well 
within 30 days of presentment of a Treasury check to a Federal Reserve 
Bank, the 150 day maximum period affords Treasury sufficient time to 
complete first examination in certain problem cases. For example, up to 
150 days may be required in instances where there are delays in 
Treasury's obtaining from check certifying or authorizing agencies the 
payment issue tapes necessary to complete first examination.

Recovery by Bank From Depositors

    The proposed rule clarifies that the regulations contained in this 
Part neither authorize nor direct any financial institution to debit 
the account of any depositor. It further clarifies that any financial 
institution's right of recovery against depositors is derived from both 
the depository contracts with its customers and any self-help remedies 
authorized by State law governing the relationship between financial 
institutions and their customers. This provision mirrors the 
regulations codified in 31 CFR part 210, which pertains to ``Federal 
Payments Through Financial Institutions By the Automated Clearing House 
Method.''

Deceased Payee Check Intercepts

    Currently, where a benefit payment check has been issued and 
negotiated after a payee's death, Treasury generally recovers the funds 
from financial institutions through the reclamation process. Financial 
institutions have expressed dissatisfaction with these procedures 
because Treasury reclamation actions only occur after final payment and 
because in many instances the depositors have closed their accounts or 
withdrawn most or all of the funds. These financial institutions seek a 
process by which Treasury can intercept such checks upon presentment 
and return such checks unpaid before the financial institutions are 
required under Federal Reserve Regulation CC (12 CFR part 229) to make 
funds permanently available to their depositors. This proposed rule 
responds to those concerns, and should result in a lower volume of 
payments to nonentitled payees.
    Specifically, it clarifies that benefit payment checks issued after 
a payee's death are not payable. It also sets forth procedures by which 
Treasury will instruct the Federal Reserve to intercept such checks 
upon presentment and return unpaid those checks which are successfully 
intercepted to the depositary banks.

Forged Drawer's Signature

    On September 11, 1995, the United States Court of Federal Claims 
filed an opinion in the case of ABN AMRO Bank, N.V. v. United States, 
34 Fed.Cl. 126 (1995), which held that, under Federal common law, 
Treasury generally cannot recover on a Treasury check bearing the 
forged signature of a drawer (i.e., disbursing officer). The Court 
further held that this result is not changed when a check also bears a 
forged indorsement on the back. In so ruling, the Court relied on the 
precedent of United States v. Chase National Bank, 252 U.S. 485 (1920), 
which, in turn, had relied on the English case of Price v. Neal, 97 
Eng.Rep. 871, 3 Burr. 1354 (1762). The Court went on to hold that 
Treasury had failed to act in a manner which made evident an intent to 
modify by regulation the holdings of these cases.
    This ruling is inconsistent with Treasury's longstanding policy and 
interpretation of its regulations, which has been that the Government 
does not bear the loss on checks bearing forged drawers' signatures, 
including counterfeits. In order to clarify this matter, we are 
reissuing the proposed rule. Treasury is cognizant of relevant United 
States Supreme Court precedent interpreting the common law in this area 
and, by this regulation, will remove any ambiguity regarding Treasury 
having supplanted that common law. In so acting, Treasury relies on the 
Secretary's general rulemaking authority, 31 U.S.C. 321, as well as the 
specific statutory authority of the Secretary to prescribe regulations 
on the payment of drafts, found at 31 U.S.C. 3328(e).

Rulemaking Analysis

    It has been determined that this regulation is not a significant 
regulatory action as defined in E.O. 12866. Therefore, a Regulatory 
Assessment is not required.
    It is hereby certified pursuant to the Regulatory Flexibility Act 
that this revision will not have a significant economic impact on a 
substantial number of small business entities. Accordingly, a 
Regulatory Flexibility Act analysis is not required.
    These regulations impose time frames within which first examination 
of Treasury checks must be accomplished, and establish consequences for 
the failure of Treasury to honor those time frames. Consequently, these 
regulations provide financial institutions with greater certainty 
regarding the entire payment process, and place higher standards of 
performance on Treasury in its processing of checks.
    The other principal provision of these regulations will reduce the 
likelihood that final payment on Treasury checks will be made to 
nonentitled persons. Treasury's efficiency and its ability to serve the 
needs of legitimate payees of benefit programs will thereby be 
enhanced.
    Although these regulations assign to banks the risk of loss on 
materially defective Treasury checks, this traditionally has been 
Treasury's practice and policy. Even if these regulations were to be 
viewed as representing a change in practice or policy, however, the 
impact on the economy, or any sector thereof, or on small business 
entities, would be minor.

[[Page 29316]]

Notice and Comment

    Public comment is solicited on all aspects of this proposed 
regulation. Comments previously received on the substance of this 
proposed regulation will be considered together with comments submitted 
in response to this notice.
    Therefore, while commenters are free to submit additional comments 
at this time, they need not re-submit earlier comments. Treasury does 
not intend to hold hearings.

List of Subjects in 31 CFR Part 240

    Banks, Banking, Checks, Counterfeit checks, Federal Reserve system, 
Forgery, Guarantees.

    For the reasons set out in the preamble, 31 CFR part 240 is 
proposed to be amended as follows.

PART 240--INDORSEMENT AND PAYMENT OF CHECKS DRAWN ON THE UNITED 
STATES TREASURY

    1. The authority citation for part 240 is revised to read as 
follows:

    Authority: 5 U.S.C. 301; 12 U.S.C. 391; 31 U.S.C. 321; 31 U.S.C. 
3327; 31 U.S.C. 3328; 31 U.S.C. 3331; 31 U.S.C. 3334; 31 U.S.C. 
3343; 31 U.S.C. 3711; 31 U.S.C. 3712; 31 U.S.C. 3716; 31 U.S.C. 
3717; 318 U.S. 363 (1943).

    2. Section 240.1 is revised to read as follows:


Sec. 240.1  Scope of regulations.

    (a) The regulations in this part prescribe the requirements for 
indorsement and the conditions for payment of checks drawn on the 
United States Treasury. These regulations also establish procedures for 
collection of amounts due the United States Treasury because of 
payments on checks bearing forged or unauthorized indorsements or other 
material defects or alterations.
    (b) Standards contained in this regulation supercede existing 
Federal common law holding that Treasury generally cannot recover on 
checks bearing forged disbursing officers' (i.e., drawers') signatures. 
Under the provisions of this regulation, the risk of loss on checks 
bearing forged disbursing officers' signatures, including counterfeits, 
is placed on presenting banks.
    3. Section 240.2 is revised to read as follows:


Sec. 240.2  Definitions.

    (a) Agency means any department, instrumentality, office, 
commission, board, service, or other establishment of the United States 
authorized to issue Treasury checks or for which checks drawn on the 
Treasury of the United States are issued.
    (b) Bank means any financial institution, including but not limited 
to, any savings bank, national bank, state bank, and credit union 
created under Federal or state law.
    (c) Benefit payment includes but is not limited to a payment of 
money for any Federal Government entitlement program or annuity.
    (d) Certifying agency means an agency authorizing the issuance of a 
Treasury payment by a Treasury disbursing officer or a non-Treasury 
disbursing officer in accordance with 31 U.S.C. 3325.
    (e) Check or checks means a check or checks drawn on the United 
States Treasury.
    (f) Check payment means the amount paid to a presenting bank by a 
Federal Reserve Bank.
    (g) Commissioner means the Commissioner of the Financial Management 
Service, Department of the Treasury.
    (h) Days means calendar days.
    (i) Decline payment means the process whereby Treasury refuses to 
make final payment on a check by instructing the Federal Reserve Bank 
to reverse its provisional credit to a presenting bank.
    (j) Federal Reserve Bank means a Federal Reserve Bank and its 
branches.
    (k) Financial institution means any bank, including but not limited 
to, any savings bank, national bank, state bank and credit union 
created under Federal or state law.
    (l) First examination means the process of check reconciliation 
which involves comparing disbursing officer issue information on checks 
with Federal Reserve Bank payment information. Where the issue 
information is at odds with the payment information, first examination 
will include retrieval and inspection of the check, or the best 
available image thereof.
    (m) Item means a reference, as in a monthly interest billing 
statement or similar document, to a check.
    (n) Material defect or alteration means
    (1) The counterfeiting of a check; or
    (2) Any physical change on a check, including, but not limited to, 
the amount, date, payee name, or other identifying information printed 
on either the front or the back of the check; or
    (3) Any forged or unauthorized indorsement appearing on the back of 
the check.
    (o) Monthly interest billing statement means a statement prepared 
by Treasury and sent to a bank which includes the following information 
regarding each outstanding demand for refund:
    (1) The reclamation date;
    (2) The reclamation number;
    (3) Check identifying information; and
    (4) The balance due, including interest.
    (p) Person or persons means an individual or individuals, or an 
institution or institutions, including all forms of financial 
institutions.
    (q) Presenting bank means:
    (1) A financial institution which, either directly or through a 
correspondent banking relationship, presents checks to and receives 
provisional credit from a Federal Reserve Bank; or
    (2) A depositary which is authorized to charge checks directly to 
the Treasury General Account and present them to Treasury for payment 
through a designated Federal Reserve Bank.
    (r) Protest means a bank's written statement and any supporting 
documentation tendered for the purpose of establishing that the bank is 
not liable for refund of the reclamation balance.
    (s) Reclamation means a demand by Treasury for refund of the amount 
of a check payment.
    (t) Reclamation date means the date on which a demand for refund 
was prepared. Normally, demands are sent to banks within 2 working days 
of the reclamation date.
    (u) Treasury means the United States Department of the Treasury.
    (v) U.S. securities means securities of the United States and 
securities of Federal agencies and wholly or partially Government-owned 
corporations for which Treasury acts as the transfer agent.
    (w) Unauthorized indorsement means:
    (1) An indorsement made by a person other than the payee or payees, 
except as authorized by and in accordance with Sec. 240.5 and 
Sec. 240.11 through Sec. 240.15;
    (2) An indorsement by a financial institution under circumstances 
in which the financial institution breaches the guaranty of indorsement 
required of it by Sec. 209.9(a) of this title;
    (3) A missing indorsement where the depositary bank had no 
authority to supply the indorsement.
    4. Section 240.3 is amended by revising paragraphs (c), (d) and (e) 
to read as follows:


Sec. 240.3  Limitations on payment.

* * * * *
    (c)(1) Treasury shall have the right as drawee to examine checks 
presented for payment and reconcile or direct the Federal Reserve Bank 
to refuse payment of any checks.
    (2) Receipt of credit by a financial institution from a Federal 
Reserve Bank shall be provisional until Treasury

[[Page 29317]]

completes first examination of the check.
    (3) When first examination by Treasury establishes that a check has 
a material defect or alteration, Treasury will decline payment on the 
check.
    (d) Notwithstanding the provisions of paragraph (c) of this 
section, when issue information is not available within 150 days after 
the check is presented to the Federal Reserve Bank for payment, or when 
first examination is otherwise not completed within such time frame, 
Treasury will be deemed to have made final payment on the check.
    (e) Notwithstanding the provisions of paragraph (d) of this 
section, if Treasury is on notice of a question of law or fact about 
whether a check is properly payable upon presentment for payment, and 
Treasury refers such question to the Comptroller General under 31 
U.S.C. 3328(a)(2), the Commissioner may defer final payment on the 
check until the Comptroller General settles the question.
* * * * *
    5. Section 240.4 is amended by removing paragraph (a) introductory 
text; by removing paragraph (b); by redesignating paragraphs (a)(1), 
(a)(2) and (a)(3) as paragraphs (a), (b) and (c); and by revising newly 
redesignated paragraphs (a) and (c) to read as follows:


Sec. 240.4  Cancellation and distribution of proceeds of checks.

    (a) Any check issued on or after October 1, 1989 that has not been 
paid and remains outstanding for more than 12 months will be cancelled 
by the Commissioner.
* * * * *
    (c) On a monthly basis, the Commissioner will provide to each 
agency that authorizes the issuance of Treasury checks a list of those 
checks issued for such agency which were cancelled during the preceding 
month pursuant to paragraph (a) of this section.
    6. Section 240.6(a) is revised to read as follows:


Sec. 240.6  Reclamation of amounts of paid checks.

    (a) If Treasury determines:
    (1) That a check has been paid over a forged or unauthorized 
indorsement; or
    (2) That a check containing a material defect or alteration is 
deemed paid under Sec. 240.3, the presenting bank or any other indorser 
shall be liable to the Treasury for the full amount of the check 
payment. The Commissioner may reclaim the amount of the check payment 
from the presenting bank, or from any other indorser that breached its 
guaranty of indorsement prior to:
    (i) The end of the 1-year period beginning on the date of 
provisional payment; or
    (ii) The expiration of the 180-day period beginning on the close of 
the period described in paragraph (a)(2)(i) of this section if a timely 
claim under 31 U.S.C. 3702 is presented to the certifying agency.
* * * * *
    7. Section 240.9 is amended by revising paragraphs (a)(1), (a)(3), 
introductory text, (a)(3)(ii), and (a)(3)(iv) to read as follows:


Sec. 240.9  Processing of checks.

    (a) Federal Reserve Banks. (1) Federal Reserve Banks shall cash 
checks for Government disbursing officers when such checks are drawn by 
the disbursing officers to their own order. Payment of such checks 
shall not be refused except for material defect or alteration of the 
check.
* * * * *
    (3) As a depository of public funds, each Federal Reserve Bank 
shall:
* * * * *
    (ii) Give immediate provisional credit therefor in accordance with 
their current Time Schedules and charge the amount of the checks cashed 
or otherwise received to the account of the Treasury, subject to first 
examination and payment by Treasury.
* * * * *
    (iv) Release the original checks to a designated Federal Records 
Center upon notification from Treasury. Treasury shall return to the 
forwarding Federal Reserve Bank a copy of any check the payment of 
which is declined upon the completion of first examination, together 
with notice of the declination. Federal Reserve Banks shall give 
immediate credit therefor in Treasury's account, thereby reversing the 
previous charge to the account for such check. Treasury authorizes each 
Federal Reserve Bank to release a copy of the check to the indorser 
when payment is declined.
* * * * *
    8. Section 240.13 is amended by adding paragraph (c) to read as 
follows:


Sec. 240.13  Checks issued to deceased payees.

* * * * *
    (c) Deceased payee check intercepts. (1) A benefit payment check, 
issued after a payee's death, is not payable. When a certifying agency 
learns that a payee has died, the certifying agency shall give 
immediate notice to Treasury. Upon receipt of such notice, Treasury 
will instruct the Federal Reserve Bank to refuse payment on the check 
upon presentment. The Federal Reserve Bank will make every appropriate 
effort to intercept the check. Where a check is successfully 
intercepted, the Federal Reserve bank will refuse payment, and return 
the check unpaid to the bank with an annotation that the payee is 
deceased. Where a financial institution learns that a date of death 
triggering action under this section is erroneous, the appropriate 
certifying agency which authorized the issuance of the check should be 
contacted.
    (2) Nothing in this section shall limit the right of Treasury to 
institute reclamation proceedings under the provisions of Sec. 240.6 
with respect to a deceased payee check paid over a forged or 
unauthorized indorsement.
    9. Section 240.16 is added to read as follows:


Sec. 240.16  Lack of authority to shift liability.

    (a) This part neither authorizes nor directs a bank to debit the 
account of any party or to deposit any funds from any account in a 
suspense account or escrow account or the equivalent. However, nothing 
in this part shall be construed to affect a bank's contract with its 
depositor(s) under authority of State law.
    (b) A bank's liability under this part is not affected by any 
action taken by it to recover from any party the amount of the bank's 
liability to the Treasury.
    9. Section 240.17 is added to read as follows:


Sec. 240.17  Implementing instructions.

    Procedural instructions implementing these regulations will be 
issued by the Commissioner of the Financial Management Service in 
volume I, part 4 and volume II, part 4 of the Treasury Financial 
Manual.
Russell D. Morris,
Commissioner.
[FR Doc. 97-14174 Filed 5-29-97; 8:45 am]
BILLING CODE 4810-35-U