What Is a Crossed Cheque and How Does It Work?

Crossed cheques are a financial tool designed to ensure secure transactions by requiring funds to be deposited into a bank account rather than being cashed. This security feature reduces fraud and provides a clear paper trail for transactions, benefiting both individuals and businesses that rely on cheque-based payments. These cheques feature specific markings that dictate their processing path through the banking system.

Purpose and Applications

Crossed cheques enhance transaction security by mandating direct deposit into a bank account, reducing risks associated with bearer cheques. This is especially advantageous for businesses managing large cheque volumes, ensuring payments reach the intended recipient and minimizing misappropriation. In addition, they support anti-money laundering (AML) measures by creating an audit trail, which is essential in jurisdictions with strict AML regulations, such as the European Union’s Fifth Anti-Money Laundering Directive (5AMLD).

For individuals, crossed cheques provide security for significant transactions, such as real estate deals, and enforce payment terms in contracts by ensuring funds are accessible only to the designated payee.

Types of Crossings

Crossed cheques are categorized based on the specific instructions that guide their processing. Understanding these types is key for issuers and recipients to ensure compliance and transaction security.

General

General crossing, the most common type, is marked by two parallel lines across the cheque, often with “and company” or “not negotiable.” This crossing requires the cheque to be deposited into a bank account rather than cashed. It offers flexibility, as the payee can deposit the cheque into any bank account. From a regulatory perspective, general crossings comply with the Uniform Commercial Code (UCC) in the United States, which governs negotiable instruments to reduce fraud and enhance traceability.

Special

Special crossings specify a particular bank for processing, indicated by writing the bank’s name between the lines. This restriction ensures the cheque is negotiated only through the named bank, providing additional security. It is particularly useful when the drawer wants the transaction handled by a trusted institution, reducing unauthorized access risks. Special crossings align with International Financial Reporting Standards (IFRS), which emphasize accurate financial reporting and asset protection.

Account Payee

The account payee crossing is the most restrictive, marked by “account payee” or “account payee only” between the lines. This ensures the cheque can only be deposited into the named payee’s account, eliminating the possibility of endorsement to another party. It is commonly used in business transactions to guarantee that payments reach the intended recipient. Legal frameworks like the UK’s Cheques Act 1992 support this type of crossing, protecting payee rights. Businesses employing account payee crossings improve internal controls and comply with financial reporting standards, reducing discrepancies.

Clearing Process

The clearing process for crossed cheques ensures accurate fund transfer from the drawer’s account to the payee’s account. It begins when the payee deposits the cheque into their bank account. The collecting bank sends the cheque to a clearinghouse, which facilitates the exchange of cheques among banks to settle transactions.

During clearing, the cheque undergoes verification checks, including authenticity and fund sufficiency. Digital imaging and electronic processing, such as those enabled by the Check 21 Act in the United States, expedite this process, saving time and reducing costs. Once verified, the clearinghouse initiates the debit of the drawer’s account and the credit of the payee’s account. The paying bank ensures compliance with financial regulations, such as the Basel III framework, which emphasizes liquidity and capital reserves. If issues like insufficient funds arise, the cheque is returned, potentially incurring fees and causing delays.

Depositing for the Payee

When a payee receives a crossed cheque, depositing it into their bank account is the next step. This involves endorsing the cheque, if required, and presenting it to their financial institution. Many banks now offer mobile deposit services, allowing payees to deposit cheques via smartphone apps, which is both convenient and aligned with modern banking practices.

For businesses handling high cheque volumes, automated clearing services simplify operations. These services often integrate with accounting software, enabling real-time record updates and improving cash flow management. Such systems enhance compliance with accounting standards like GAAP, which mandate accurate and timely financial reporting. Additionally, businesses can utilize positive pay systems, a fraud prevention tool where banks verify cheque details against a list provided by the company before processing.