Implementing the Check 21 Act: Potential Risks Facing Banks
The Check Clearing for the 21st Century Act (the Check 21 Act), effective October 28, 2004, is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation. It introduces a new negotiable instrument, called a substitute check, and makes it the legal equivalent of the original check. Before the Check 21 Act, absent an agreement of the paying bank to take presentment of the check in electronic form, collecting banks had to send the original paper check to paying banks. Since the Check 21 Act became effective, collecting banks may instead truncate the original check and, without the paying bank’s agreement, send a substitute check to the paying bank.