There may be misconceptions that trust account cheques are not subject to regular bank clearing rules that apply to all cheques. This is not the case. Banks may hold funds on deposited cheques until the cheque is cleared, meaning that those funds cannot be paid out for a number of days.
Historically staff at the branch level have had the ability to override the holds and have often done so to assist lawyers in closing transactions. With increasing fraud, banking rules and policies are changing, including reducing the discretion of bank staff, and cheques are more frequently being held for the clearing period.
Risks:
If you are relying on having immediate access to funds deposited by cheque, including a cheque from another lawyer’s trust account, you are risking that the transaction will not be completed on the expected date, as the bank may put a hold on the funds.
If you pay out funds based on any deposited cheque before the cheque has cleared you are putting yourself at risk of fraud. Having a deposit slip or seeing the balance appear in your account online does not mean the cheque can not be returned NSF and the deposit reversed.
Recent Changes: Have you talked to your bank about hold policies lately?
We have recently been informed of automatic holds being placed on some cheques over a particular dollar threshold. An automatic hold policy is starting to be implemented at some financial institutions. These policies are catching some law firms off guard. If a cheque is flagged, a hold may be placed, unless the branch manager approves the item and chooses to waive the hold. This has been creating issues with trust accounts. It is our understanding that the banks will be issuing a communication explaining any new policy.
The Trust Accounts Team at the Society wants to remind Nova Scotia lawyers to follow best practice when using any form of paper-based payment such as trust cheques. The Society does not guarantee trust cheques because we do not know the financial position of the lawyers’ clients that made deposits.
Paper-based payment instruments such as cheques, certified cheques, money orders and bank drafts are subject to forgery, fraud or can potentially be returned due to insufficient funds, holds, restrictions on deposits or stop payments. Any financial institution’s choice to implement a holding policy is for the purpose of combating fraud. Prior to making a withdrawal from a trust, a lawyer must ensure that the client has sufficient money in trust to cover the withdrawal and the trust bank account has sufficient funds to permit the withdrawal to be completed. Failure to complete the second step is a common source of inadvertent trust shortages, where a payment is made before the necessary funds into trust have cleared the bank account.
To prevent these types of shortages, please follow best practice:
Allow four to five business days for any paper-based payment instrument to clear the bank prior to making a withdrawal; or, receive funds by wire payment as this is usually guaranteed and irrevocable. (Verify with your bank as to the type of electronic deposit received or to be used, not all electronic payment methods are the same. Typically wires are almost immediate and irrevocable, but other types of electronic transfer may not be irrevocable)
What should your next steps be?
Have a conversation with your branch manager and request information about hold policies. Gain an understanding of items or a dollar threshold that may cause a flag to have a hold put on a trust cheque automatically. It is important to stay well informed as we learn how the use of trust cheques will be impacted going forward. In the future, it will be more commonplace to increase the use of electronic funds transfers or wires.
Electronic Banking
As a reminder, please be cautious when using electronic banking. Fraudsters have become more sophisticated and may have hacked your client’s email account. If you receive a request for a change in banking information, it is best practice to also verify the change over the phone.