Non-cash alternatives and money laundering an American model for Canadian consumers’ protection

INTRODUCTION

(1) and the benefits are enjoyed, not by the drug users, but by the people who profit from the laundering of this money.(2) Article 1 of the European Community Directive “on prevention of the use of the financial system for the purpose of money laundering” defines money laundering as the conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an activity to evade the legal consequences of his action, the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, the acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such activity, participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the actions mentioned in the foregoing paragraphs.(3)

Indeed, money laundering is detrimental primarily because it permits perpetrators of the underlying illegal acts to profit from their activities by concealing from law enforcement authorities the illicit source of funds.

Thus the Financial Action Task Force(4) has made a series of recommendations to combat money laundering. One of these is the encouragement of non-cash transactions. From the standpoint of payors and payees, as well as from the standpoint of law enforcement, the debit card seems to be the most attractive alternative to cash. However, an analysis of the history of cash reveals the possibility that the debit card is strikingly similar to the original form of paper money and, therefore, may evolve into a form of cash, hence frustrating attempts to trace payment transactions and to identify the illegal sources of funds laundered.

Combatting money laundering may be the most significant contribution that the financial community can make to the war against illegal drug use and other crimes. However, the encouragement of non-cash transactions, in itself, is unlikely to have a significant long-term effect in combatting the underlying illegal activities. Indeed, given the lack of Canadian legislation governing debit cards, the encouragement of non-cash transactions in effect may subject consumers to undue manipulation by the more sophisticated and powerful financial institutions that write contracts governing such transactions. In order to avoid exploitation of the asymmetrical power between such institutions and consumers, Canadian legislators must intervene to define the rights and obligations of parties to debit card and other payment transactions that are inadequately governed by existing laws. If not, any effort to encourage non-cash transactions through governmental intervention or otherwise may have the additional inadvertent effect of permitting financial institutions to exploit consumers. The Electronic Fund Transfer Act(5) of the United States serves as a valuable model of legislation that protects the interests of consumers while attaining both economic efficiency and social equity.

This article examines the steps taken by some countries to combat money laundering. It also evaluates the recommendation by the Financial Action Task Force that non-cash transactions be encouraged. In addition, it analyzes the modern alternatives to cash transactions — checks, wire transfers, and payment cards, particularly debit cards — in combatting money laundering. The article concludes that if the Financial Action Task Force recommendation is followed, and alternatives to cash are encouraged, debit cards are likely to fill an important role as this alternative. However, money launderers may begin to treat debit cards as cash, thus frustrating attempts to trace payment transactions undertaken with debit cards. Regulation such as the United States Electronic Fund Transfer Act(6) will be required to protect consumers from potential abuse and error with respect to this payment mechanism.

MONEY

As F.A. Mann states, “[m]oney is a chattel personal.”(7) Indeed, the “payment of money in the discharge of a debt is very much like the sale of a chattel

Currency can be described as the transferability of money from hand to hand, in payment of debts, free from claims to it on the part of all persons, including prior owners or possessors.(10)

Therefore, “in case of money stolen, the true owner cannot recover it after it has been paid away fairly and honestly upon a valuable and bona fide consideration.”(11) The transfer of money that has been stolen ends the original person’s right to it unless (1) the holder is a volunteer, or (2) the holder obtained the money in bad faith.(12)

In addition to being a chattel and to having currency, money has a number of other characteristics. F.A. Mann suggests that, in law, these other characteristics are: (1) attribution by law of the character of money

At one time, in law, only coins could be money. For instance, in Tassell and Lee v. Lewis,(15) it was held that a creditor had the right to refuse the offer of a goldsmith’s note and to demand payment in coins. However, in law, money now consists of both coins and bank notes:

Purely legal definitions of money in concreto used to include characteristics exclusively relating to coinage. Thus regard was had to weight, fineness, and impression. But although even modern economists and jurists have gone so far as to exclude things of valueless material, such as bank notes, from the notion of money, such a view is today certainly irreconcilable with the facts of commercial life. It follows that incidents relating to substance can no longer be included in the notion of money.(16)

Therefore, it is possible that a payment mechanism such as a debit card may become money in law if refusal to recognize it as such becomes “irreconcilable with the facts of commercial life.”

The economists’ definition of money is broader than that commonly accepted by lawyers. The former encompasses everything that functions as money, including treasury bills, bank accounts, postal giro accounts(17) and possibly even checks, bills of exchange, and bankers’ drafts. Thus, the economists’ definition of money may encompass other payment mechanisms such as debit cards. Nonetheless, because the legal definition of money is narrower than the economic one, treasury bills, bank accounts, postal giro accounts, checks, bills of exchange, and bankers’ drafts cannot discharge a debt in the absence of the creditor’s consent.(18)

MONEY LAUNDERING

Money may be laundered if it is dirty. Money becomes dirty either through tax evasion, illegal generation, or both. In the first way, money is made legally and then not reported to tax authorities.(19) The second method, illegal generation, may involve any one of a number of activities including bribery, gambling, and drug sales.(20) Finally, as Welling notes, the two methods are combined when money made illegally is not reported.(21)

In order for dirty money to be spent or invested, its illegal application, illegal source, or existence must be concealed and disguised to appear legitimate. Otherwise law enforcement authorities would be able to trace, identify, and prosecute the perpetrators of the underlying illegal activities. The process by which this concealment and disguise take place is referred to as “money laundering.”(22) Money laundering has also been defined as “the conversion of direct or indirect proceeds of crime into conventional funds by funnelling them through various financial institutions.”(23)

Frequently, the efforts of investigators to trace money derived from illegal activities are hampered by numerous transfers between accounts that obscure the trial of funds.(24) Money obtained legally also may be laundered in this way to conceal it from the tax collector. In addition, cash may be converted into a less conspicuous and physically manageable form.(25) For instance, money can be laundered through deposits in deposit-taking institutions, and also can be used to purchase other financial instruments such as term annuities and marketable securities.(26)

Laundering is necessary only if the magnitude of cash involved is large. A criminal can absorb a small amount of dirty cash, for example $100,000, into his or her lifestyle by purchasing such items as travel, meals in restaurants, cars, and clothing. However, it is difficult to absorb and spend the vast amounts of cash generated in the drug industry.(27) For example, the police in New York seized five thousand pounds of cocaine that, if sold on the street, would have generated $355 million in cash.(28)

The drug trade involves billions of dollars per year.(29) The amount of cash collected is so large that it is difficult for participants to dispose of the funds.(30) Indeed, “one informant claims that getting rid of the money has become the hardest part of the dope business.”(31) Drug dealers and importers must weigh rather than count it, or must use high-speed counting machines.(32)

Money laundering is damaging, regardless of its objectives. Laundered money does not share any proportion of the tax burden. Moreover, such illegal activities as gambling and drug selling thrive because of money laundering. These and other cash generating crimes are worthless if the cash cannot be spent or invested. In the absence of money laundering, the rewards of these activities do not compensate for the risks. Thus, laundering is the key to success of these criminal ventures.(33) Indeed, “[m]oney laundering is the only aim of drug trafficking.”(34)

Although money laundering may be motivated by a number of illegal activities, most laundering transactions are derived from drug trafficking.(35) It has been estimated that in the United States the drug trade involves from $50 to $110 billion.(36) In Canada, the drug-trafficking industry may be worth approximately ten to thirteen billion dollars annually.(37) Indeed, between January, 1989 and March, 1990 in Canada, approximately $30 million worth of property and cash was seized by police forces. This amounted to only a fraction of the country’s drug revenues. Authorities in the United States seized approximately $1 billion worth of goods financed by drugs, and this represented “less than one percent of the estimated $110 billion generated by U.S. drug deals.”(38)

More importantly, the drug trade shows no signs of diminishing:

Operating from a safe distance, the drug lords have carved out global drug trafficking networks allowing them to live like feudal barons on vast, heavily-guarded estates. A decade ago, the Colombian drug barons were content to sell their drugs through numerous, autonomous middlemen who worked independently across North America. A profitable industry has emerged in the United States, fuelled by Colombian drug cartels who have established sophisticated smuggling, marketing and money-laundering machinery operating as efficiently as any retail “dealer” network.(39)

Additionally, members of established professions have been known to conduct money laundering activities. For example, in early 1990, the Luxembourg bank, Bank of Credit & Commerce International, “pleaded guilty to running the biggest single-bank drug-money laundering operation in U.S. history.”(40) In another case, a U.S. doctor was charged after The Royal Bank of Canada advised police of unusual cash transactions.(41) There are also concerns that lawyers have been involved in money laundering transactions

REGULATORY STEPS TAKEN TO COMBAT MONEY LAUNDERING

Regulators in many jurisdictions have recognized the magnitude of the amount of money laundered and the role that money laundering plays in sustaining the profitability of illegal activities. Thus, a number of initiatives have been implemented to thwart the illegal schemes of getting rich and evading taxes, to impede the use of money obtained from illegal endeavors, and hence, to deprive launderers of the benefits motivating the underlying illicit activities. The steps taken to combat money laundering include national and multinational endeavors.

United States

In 1970, a statute was adopted by the United States Congress requiring financial institutions to report to the government any cash transactions larger than $10,000.(43) It is a crime to fail to submit these reports.(44) Subsequently, in 1987, the structuring of financial transactions to evade this reporting requirement also became a criminal offense. Ultimately, legislation was passed making money laundering per se a crime.(45) Indeed, the United States provisions to combat money laundering are so powerful that authorities can seize assets suspected to be derived from the proceeds of illegal activities “without either lodging or winning charges against a person.”(46) On the international front, the Kerry Amendment to the Anti-Drug Abuse Act of 1988 allows the United States to terminate relationships with a country’s financial institutions if it is established that that country has acted in bad faith during attempts to solve money laundering cases.(47)

Canada

In Canada, the legislative steps taken to combat money laundering have been less extensive than in the United States. Thus, “in some quarters, Canada has acquired the reputation of being a money-laundering haven.”(48) Nonetheless, financial institutions have undertaken a number of voluntary practices in order to detect potential money laundering transactions. It has been asserted that because the Canadian attack puts bank tellers on the front line and arms them with weapons combining human judgment, personal responsibility, and standardized procedures based on the principle of “Know Your Customer,” the Canadian strategy “is more effective and less intrusive for honest customers than the U.S. approach.”(49)

All of the major banks have developed and implemented procedures(50) and policies to combat money laundering.(51) For instance, with respect to large cash transactions, customers must sign a form declaring the source of funds,(52) and the banks’ policy is to turn away business if the customer refuses to disclose the source of funds.(53) Moreover, even if the funds are accepted for deposit, an investigation may be conducted by security personnel and, ultimately, the police contacted if suspicions are harbored.(54) In addition, most banks maintain and review records of unusual or large cash transactions to identify suspicious activity(55) and assist law enforcement authorities.(56) Helen Sinclair asserts that “[o]ur Canadian practices provide meaningful leads to the police – and create a useful audit trail – while protecting privacy. And our approach avoids bombarding the government with mounds of paper and creating new administrative burdens that government can ill afford.”(57)

Moreover, in January 1989, the Criminal Code(58) was amended to make money laundering a crime. The amendment is analogous to sections of the United States Money Laundering Control Act of 1986,(59) and the new provisions also permit the seizure of property derived from illegal activities including drug offenses. Indeed, millions of dollars have already been confiscated under these Canadian provisions.(60)

Nonetheless, there is room to enhance the measures taken in Canada to combat money laundering. Canada’s approach must become more systematic and uniform. For example, there is no legal requirement that Canadian customs officials report large sums of money crossing Canadian borders. In addition, the government should find ways to assess accurately the size of the money laundering business in Canada.(61) However, it is unlikely that the legislative steps taken in Canada will be as extensive as those in the United States. Canada’s Solicitor General has stated that “[o]ur action as a government has consisted in avoiding all unnecessary regulation, and taking advantage of what has been achieved by the private sector.”(62)

Switzerland

Switzerland also has implemented significantly fewer measures than the United States in the fight against money laundering. Prior to 1990, the lack of criminal sanctions directed specifically at money laundering put Switzerland at risk of becoming a haven for money launderers.(63) Thus, Switzerland introduced legislation making money laundering a crime

However, unlike the measures taken by other countries such as the United States to combat money laundering, the new Swiss laws impose no requirement to report large, suspicious cash transactions. Furthermore, they do not apply to non-natural entities such as corporations, and normally do not permit bankers to cooperate with foreign enforcement officials.(67)

European Community Directive

The Council of the European Communities also has recognized that “money laundering has an evident influence on the rise of organized crime in general and drug trafficking in particular,”(68) and therefore has adopted a directive(69) under which Member States are obliged to enact laws to “ensure that money laundering is prohibited”(70) by January 1, 1993.(71) The provisions require Member States to ensure that both financial and non-financial(72) institutions obtain customer identification,(73) maintain transaction records,(74) and examine suspicious transactions.(75) These establishments will also be required to provide information voluntarily to law enforcement authorities(76) without disclosing to their customers the fact that this information has been transmitted,(77) and will be obliged to establish internal control and training procedures to prevent execution of money laundering transactions.(78) In addition, the Member States have agreed to protect institutions and their employees from liability for disclosing information in good faith to authorities responsible for combating money laundering.(79)

The European Commission is to oversee a Committee responsible for facilitating implementation of the Directive.(80) In particular, the Council has recognized the need to take action to combat money laundering within the framework of international initiatives including the recommendations of the Financial Action Task Force and the provisions of the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.(81)

United Nations Convention Against Illicit Drugs

It has been observed that the problems of drug abuse and trafficking have reached the threshold level of opprobrium at which governments are prompted to subordinate sovereignty and other national interests in order to take collective action.(82) As such, two United Nations Conventions, the Single Convention on Narcotic Drugs, 1961(83) and the Convention on Psychotropic Substances, 1971,(84) have been adopted to address this issue. A more recent multinational initiative undertaken to reduce the problems of drug trafficking as they have developed within the last fifteen years is the United Nations Convention Against Illicit Drugs

The Convention is very broad in scope. It is directed at enhancing the exchange of information and facilitating the confiscation of assets obtained from illegal drug transactions,(86) and requires parties to pass legislation prohibiting the laundering of money derived from illicit drug trafficking.(87) In prescribing the obligations of signatories, the Convention addresses creation of offenses,(88) assumption of jurisdiction,(89) confiscation of proceeds,(90) cooperation in prosecutions,(91) supervision of delivery,(92) manufacture of drugs,(93) cultivation of substances,(94) transportation of drugs,(95) traffic by sea,(96) and use of the mails.(97)

Moreover, particular provisions of the Convention directly address money laundering. Under Article 3, parties must establish as a criminal offense the laundering of proceeds related to particular drug activities. Paragraph 10 strengthens this provision by specifying that offenses “shall not be considered as fiscal offenses.” This prevents states from using the fiscal offense exception to thwart efforts to trace laundered money.(98)

Pursuant to Article 5 of the Convention, parties must facilitate confiscation of proceeds, or an equivalent value of property, derived from offenses, even if those proceeds have been intermingled or converted. In addition, parties to the Convention must empower authorities to seize, freeze, trace, and identify proceeds, and must enable courts to order the seizure of commercial, financial, or bank records. This Article also requires parties to cooperate with other states by seeking orders to confiscate proceeds or to enforce a requesting state’s order for confiscation, and by taking steps to seize, freeze, trace, or identify property. In addition, Article 7 imposes upon parties the obligation to provide for one another the highest standard of mutual assistance, and includes the obligation to make business, corporate, financial, and bank records available when requested.(99)

The enforcement provisions of the Convention are weak, and parties may escape from some obligations that offend national constitutional provisions or are in other ways objectionable.(100) Nonetheless, the effect of the Convention is to create for drug trafficking a special regime of mutual legal assistance, and to address many of the current problems of illegal drug trafficking.(101)

The Group of Seven Financial Action Task Force

Another multinational initiative motivated by the need to address illegal drug trafficking focuses specifically on money laundering. At the fifteenth annual Economic Summit in Paris in July 1989, it was stated that “the drug problem has reached devastating proportions” and that both national and international action was urgently required to be taken. Therefore, as part of the overall approach to this problem, a Financial Action Task Force (FATF) was convened

to assess the results of the cooperation already undertaken to prevent the utilization of the banking system and financial institutions for the purpose of money laundering, and to consider additional preventive efforts in this field, including the adaptation of the statutory and regulatory systems to enhance multilateral legal assistance.(102)

Eight nations were invited to join the Task Force and more than one hundred and thirty experts from bank regulatory and supervisory agencies, law enforcement authorities, and ministries convened and cooperated. Several meetings were held in Paris, and one in Washington. Three working groups were created to examine administrative and financial cooperation, legal questions, and money laundering statistics and methods. The Report of the Financial Action Task Force on Money Laundering is based on the comprehensive studies compiled by these working groups.(103)

The Report of the Financial Action Task Force analyzes the process of money laundering and the programs implemented to combat it. In addition, the report presents recommendations to enhance the effectiveness of national and international systems aimed at combatting money laundering. Recommendation 25 states that

given the crucial importance of cash in drug trafficking and drug money laundering, and despite the fact that no clear correlation could be established between the cash intensiveness of a country’s economy, and the role of this economy in international money laundering, countries should further encourage in general the development of modern and secure techniques of money management, including increased use of [checks], payment cards, direct deposit of salary [checks], and book entry recording of securities, as a means to encourage the replacement of cash transfers.(104)

Thus, the premise of Recommendation 25 seems to be that the replacement of cash transfers will facilitate detection of the source of funds and that the effect of this will be to impede money laundering activities. However, the difficulty with this approach is that money launderers are likely simply to devise new methods of money laundering less susceptible to detection. Therefore, it is questionable whether resources spent in pursuing this recommendation could achieve any significant long-term progress in combatting money laundering. On the contrary, given the absence of comprehensive legislative regulation in Canada of some non-cash payment mechanisms such as debit cards, the encouragement recommended may subject consumers to undue risk and manipulation.

This result is less likely in the United States, however, where the Electronic Fund Transfer Act,(105) a product of negotiation between the American Bankers Association and consumer lobby groups, regulates a number of payment mechanisms including debit cards.(106)

PAYMENT MECHANISMS

The alternatives to cash specified in Recommendation 25 of the Financial Action Task Force are primarily payment mechanisms. In order for debts to be paid, money must be transmitted from the debtor to the creditor. Payment mechanisms are a means of doing this and developed in response to the scarcity of money, as well as to eliminate or at least reduce the risks and costs of transporting money to pay debts.(107) Thus, payment mechanisms have been defined as “machineries that [facilitate] the transmission of funds while avoiding physical delivery of money.”(108) It has also been noted that,

for substantially large payments, any payment in specie, in coins or bank notes, is inconvenient, and practically speaking, may not be widespread. Large sum payments are accomplished through the use of payment mechanisms.(109)

Indeed, the primary raison d’etre of payment mechanisms is to reduce or avoid the transportation or carriage of money.(110)

Various techniques are utilized for the transmission of money.(111) However, Geva asserts that despite the variety in forms and techniques, there is a common denominator to all payment mechanisms.(112) They are based on three-party arrangements whereby “A owes money to B, [and] A’s discharge is to be effected by X’s payment to B, made with A’s authority”.(113) Furthermore, the payment by B may be made in specie, or where X is a depositary of money owing A, by a mere bookkeeping entry. A credit transfer occurs when A instructs X directly, and a debit transfer results when A directs X via B. Moreover, a paper-based system exists if A’s directions are written on paper, and an electronic funds transfer system contemplates the embodiment of A’s directions in an electronic message medium such as a magnetic tape.(114) A GIRO system(115) is a payment system consisting of either credit or debit transfer, either paper-based or electronic funds transfer “where (i) B is not to be paid in specie and (ii) A’s payment instructions are not embodied in paper currency.”(116)

Examples of payment mechanisms are goldsmiths’ notes, which evolved into an early type of promissory note, and checks.(117) More advanced technological payment mechanisms such as wire transfers involve such electronic means of communication as telegraph or telex.(118) Payment cards such as credit and debit cards are also forms of payment mechanisms. Indeed, paper money began as a payment mechanism, the goldsmith’s note, more than three hundred years ago. However, “[s]oon, goldsmiths’ notes and [checks] came to serve as money itself.”(119) Thus, it is quite conceivable that the debit card, which also has been introduced as a mere payment mechanism, may evolve to become plastic money in and of itself. As a form of cash, the debit card could be used, as cash currently is used, to conceal the illegal application or illicit source of funds. This would defeat the objective to combat money laundering, which objective is the impetus behind the Financial Action Task Force recommendation that non-cash transactions be encouraged.

Payment Cards

Recommendation 25 of the Financial Action Task Force Report explicitly includes reference to the use of payment cards(120) as alternatives to cash transactions. Generally, there are three generations of payment cards. The first generation is comprised of “mere plastic” or embossed cards that have been used primarily as credit cards and check guaranty cards,(121) and whose information must be copied to the sales draft incorporating the cardholder’s payment directions.(122) The second generation, the magnetic-stripe card, expedites authorization by facilitating communication to the issuer via a terminal without human intervention.(123) The third, also known as the smart card or the memory card, contains a microchip capable of storing and processing information that, in the case of a magnetic-stripe card, would require communication with a host computer.(124)

Credit cards(125) are issued either by private organizations or financial institutions and may be either vendor-based or lender-based. In the case of vendor-based cards, there are two parties: the vendor and the purchaser.(126) In the case of a lender-based credit card, there are at least three and perhaps four contracts involving the cardholder, the card-issuing bank, the merchant, and the merchant’s bank.(127) The card-holder’s agreement to pay for goods and services obtained with the card is the basis upon which money is transferred between, for example, the retailer and the retailer’s bank.(128) The success of an action against the cardholder depends on the verification of his signature. Thus, the issuance and use of credit cards constitutes a paper-based payment system.(129)

A debit card resembles a credit card, but involves discharge of a debt by reduction of the amount in the cardholder’s account.(130) When a debit card is used, the amount by which the cardholder’s account is reduced is transferred to the retailer either immediately at the time of the purchase or after some delay.(131) Although the debit card has emerged from the paper-based credit card, it developed with the evolution of the electronic funds transfer (EFT) systems and facilitates electronic access to funds such that payments may be initiated from terminals at points of sale (POS) and from automated banking machines (ABMs).(132) Unlike the credit card that provides access to the cardholder’s funds only after the cardholder confirms the bill and pays for items charged,(133) the paper-based debit card facilitates access to the cardholder’s funds “on the basis of the electronic deposit generated in the course of the on-line authorization.”(134) As a result, errors made with respect to paper-based debit cards may be more difficult to reverse and more costly to the cardholder than those involving credit cards.

In the case of an EFT debit card, use of the cardholder’s Personal Identification Number facilitates verification of the cardholder’s identity and enables the cardholder to authenticate the payment instructions at the time of the transaction.(135) If the EFT debit card is merely a second-generation payment card with a magnetic stripe, the cardholder’s Personal Identification Number is verified by communication between the point-of-sale terminal and the card issuer. On the other hand, if the EFT debit card is a third-generation smart card, the Personal Identification Number is verified at the point-of-sale terminal on the basis of information stored on the smart card without communication with the issuer. Further, the smart card may have been prepaid by the cardholder such that both identity verification and processing of the transaction may take place off-line.(136)

Thus, there is substantial potential for abuse of information and assets made accessible by debit card technology. As a result, it will be important for Canadian regulators to take steps such as passing legislation based on the United States Electronic Fund Transfer Act in order to ensure that consumers’ rights are adequately protected if debit cards are one of the alternatives encouraged to implement the Financial Action Task Force recommendation to promote non-cash transactions.

Regulation

The method by which such payment mechanisms as debit cards are governed is important because of the substantial potential for the abuse of consumers. The problems consumers of both paper-based and electronic payment systems may encounter arise in such areas as: (i) record-keeping and proof, (ii) allocation of losses attributed to fraud or mistake, (iii) stop payment and defence claims, (iv) timeliness of the items, (v) liability for errors made in transfers, and (vi) payment and settlement between the banks involved.

When individual consumers transact with financial institutions there is asymmetry of information.(137) Whereas financial institutions generally have both the monetary and human resources to ascertain, assert, and protect their legal rights, individuals commonly lack these attributes. Thus, when individual consumers transact with sophisticated institutions legislation is required “to reallocate costs in a manner that approximates the contract that the parties would have reached had they possessed the necessary information.”(138)

In the absence of legislation that considers “the consumer’s powerless position banks [have] too much leeway to be arbitrary, careless or positively oppressive.”(139) In other words, in contracts between financial institutions and consumers, financial institutions are more likely to dictate the terms and conditions because these organizations generally have more power and sophistication than consumers.(140) Thus, in the absence of legislation to protect the interests of consumers, the encouragement of non-cash transactions, as recommended by the Financial Action Task Force, has the effect of promoting the exploitation of consumers.

Nonetheless, in Canada there is little case law concerning electronic payment systems and an absence of comprehensive legislation governing their regulation.(141) Although some payment mechanisms in Canada are governed by the Bills of Exchange Act(142) which is the primary source of Canadian law on negotiable instruments,(143) generally this Act is inapplicable to payment mechanisms not expressly contemplated by it.(144) It is likely that the law governing such payment mechanisms as debit cards will develop by analogy to bills of exchange law because the courts look at similar cases to determine how entrenched principles can apply to new systems.

Presently, such payment mechanisms in Canada are governed primarily by contract.(145) “The financial community has historically resisted legislation, arguing that the institutions are best suited and best skilled to set the rules through private contract.”(146) Indeed, banks in Canada have been able to resist attempts to legislate in the area of electronic payment systems and therefore generally are able to dictate to consumers the terms of contracts governing such systems.(147)

The lack of regulation in Canada contrasts with the United States, where the Electronic Fund Transfer Act(148) regulates electronic payment mechanisms involving consumers, and Article 4A of the Uniform Commercial Code addresses issues arising in wire transfers between primarily financial and business institutions.(149) Although Article 4A was not designed to govern consumer transactions, the Electronic Fund Transfer Act(150) focuses on consumer protection. It applies to electronic fund transfers involving individual consumers and “establishes the basic rights, liabilities, and responsibilities of consumers who use electronic money transfer services and of financial institutions that offer these services.”(151)

For example, the ability of a consumer to succeed in an action for damages is enhanced by the stipulation that a person failing to comply with the Act is liable to consumers for damages even without proof of damages.(152) In addition, the liability of a consumer who loses a card is limited to only $50 if he reports the loss within two business days of learning about it, and to only $500 if he reports the loss within sixty days. He is liable for unlimited losses only if he fails to report within sixty days.(153) In contrast, in Canada, only one bank “limits the customer’s liability to $50 in respect of any amount withdrawn by a third party, provided that the customer has not disclosed his [Personal Identification Number].”(154) Moreover, the Electronic Fund Transfer Act enables the consumer to compel the bank to respond to his complaint about an error without having to resort to litigation.(155) Therefore, it appears that Canadian consumers have more to lose than do their United States counterparts by adoption of the Financial Action Task Force recommendation to encourage non-cash transactions including debit cards.

PARALLEL BETWEEN PAPER MONEY AND DEBIT CARDS

Nonetheless, encouragement of payment mechanisms such as debit cards for which records are obtained(156) would assist law enforcement authorities in identifying money laundering activities.(157) However, an examination of the history of cash reveals that debit cards may be a nascent form of cash. This raises the possibility that debit cards may be treated by money launderers as cash, thus frustrating efforts to trace debit card payment transactions and to combat money laundering.

Primitive trading transactions occurred through a barter system. Then, some chattels evolved to serve exclusively as a vehicle of exchange, and by a process of elimination, the chattel that prevailed as a universal medium of exchange was the precious metal.(158) However, precious metals were not freely transferrable from one hand to another because their weight and quality had to be affirmed. Thus, coining(159) provided the payee with the assurance that the pieces of metal tendered complied with accepted standards of size, weight, and quality.(160) Analogously, the affirmation of “quality” of a debit card could be affirmed by information stored in the microchip of a third-generation payment card.(161)

Although originally coins may have been issued privately, the State assumed this function for two reasons. First, there had to be complete faith in the quality and quantity of a standardized metallic piece in order for it to be freely transferable, and the seal of a public servant was more reliable and familiar than a private seal. Secondly, even though the seal of a well-reputed banker may have been as reliable as that of the State, the bank could protect a monopoly acquired through its reputation by transferring its coinage authority to the State.(162)

Just as private issuers commenced issuing coins, so too have private entities commenced issuing debit cards. Moreover, just as the government was attracted to the business of issuing coins, so too could the government be attracted to issuing debit cards to protect a monopoly acquired through its reputation. Thus, the issuance of plastic money could become a powerful instrument in building governmental policies.(163) Nonetheless, despite the resemblance of debit cards to coins, debit cards are more closely analogous to paper money.

The acceptance of paper money was facilitated by the recognition of the principle that the face value of a coin did not necessarily reflect its intrinsic value.(164) Paper money began as an “obligation to pay metallic money.” In the seventeenth century, merchants began leaving their money with goldsmiths, and the goldsmith’s status evolved from that of bailee or custodian to that of banker, authorized to lend to deposited money to others.(165) A depositor could take out either a goldsmith’s note or a draft.(166) As with debit cards, these were payment mechanisms in that the transmission of funds from debtor to creditor was facilitated without physical delivery of the coined money. Indeed, “goldsmiths’ notes and checks came to serve as money itself.”(167)

An analysis of the evolution of goldsmiths’ notes to paper money exhibits a striking similarity in its incipient stages to the modern genesis of the debit card. Just as the bank note, which evolved into paper money, began as a payment mechanism, so too has the debit card emerged as a payment mechanism. It facilitates the payment of money without the risks of delivery or transportation of cash.(168) Just as “paper money weighed less and required less space than metallic money”,(169) so too does plastic weigh less and require less space than paper money. Secondly, just as paper was valueless, so too is plastic valueless. Thus, just as paper money was to metallic money, so too is plastic cheap and easier to carry than paper money. Absolute loss is not the necessary consequence of the physical destruction of the debit card just as absolute loss was not the necessary consequence of the physical destruction of the bank note.

Furthermore, just as the bank note represented the banker’s commitment to pay money deposited with him, so too does the debit card. Therefore, in the long term, it may seem quite natural for banks to begin circulating and treating debit cards as money itself, just as bank notes were two hundred years ago. Ultimately, just as the State took over the power to issue bank notes, so too could the State take over the power to issue debit cards. Therefore, just as paper money became money, so too could debit cards become money.

Thus, if the convertibility of debit cards into money is abolished, just as the convertibility of paper money into gold was eradicated, it is quite conceivable that the debit card could become a specie of money itself. It could, just like the goldsmith’s note, evolve from an ordinary chattel to a specie of valuable chattel and, finally, into plastic, rather than paper (valueless chattel) embracing an abstract promise to pay money.(170)

As with paper money and, before it, metallic money, commerce has facilitated the evolution of plastic money in order to meet business needs. Moreover, just as the bank note, plastic has emerged primarily as a private instrument.(171) With respect to the debit card, it is quite conceivable that government power will prevail over financial and economic conditions to turn the debit card into plastic money, just as the bank note was turned into paper money. Indeed, observance of the Financial Action Task Force recommendation to encourage non-cash transactions may expedite this evolution. Ironically, however, the effect of the evolution of debit cards into cash would be to frustrate the objective of the Financial Action Task Force recommendation to promote alternatives to cash. The evolution of debit cards into cash would reduce the ability of the debit card to assist the fight against money laundering because the debit card could then be used to transfer funds without revealing the identity of the payor.

CASH: RIGHTS OF THE HOLDER AND PAYOR, AND COMBATTING MONEY LAUNDERING

Generally, a holder for value not participating in a fraud takes money free of its source. This exception to the principle of nemo dat quod non habet has been held to apply to both bank notes and coins such that if the coins or notes “were received in good faith and for valuable consideration, the transferee got property though the transferor had none.”(172) Hence, the holder who has obtained for value and is bona fides can rest assured that once he has received money, he will not be divested of it.

The corollary of the holder’s rights is that the interests of the payor are at greater risk. Once cash is delivered, title passes and the payor cannot recover it from a bona fide holder for value. Thus, unless there is fraud involved in a transaction, the payor cannot remedy any error he has made simply by taking back the money he paid.

Because of the ease with which holders of cash may transfer possession, cash transactions may easily take place illegally without there being any means to trace those transactions. This is particularly poignant with respect to the fight against money laundering, since the objectives of law enforcement authorities to apprehend and punish perpetrators of profitable crimes are frustrated by the ability of these offenders to retain their profits and to spend them without leaving a trail to be followed. Nonetheless, it has been noted that it becomes very difficult for large cash transactions to take place surreptitiously because of the physical volume involved. For example, drug dealers have been known to require suitcases to transport dollar-denominated bills received as payment.

Indeed, this may be the basis for the recommendation that cash transactions be discouraged. It is easy to conclude that the identification of illicit cash transactions will be expedited if legal transactions take place without the use of cash. If there are fewer cash transactions in total, illegal cash transactions may constitute a significantly larger proportion of all cash transactions.

However, the conclusion that illegal cash transactions will be easier to identify if parties to legal transactions use alternatives to cash is based on the assumption that drug money launderers will continue to receive cash as payment for illegal transactions. However, in the case of drug money laundering, “customers” may begin to pay for “merchandise” with alternatives to cash. If, for example, debit cards become treated as money, the move to discourage cash transactions may have little, if any, significant impact on the detection of money laundering.

OBJECTIVES OF ALTERNATIVES TO CASH

In determining the feasibility of successfully encouraging non-cash transactions in order to combat money laundering, this article will examine first the rights of the holders(173) and payors of checks, wire transfers and payment cards. The rights of the holder or payee are important because, as a practical matter, it is unlikely that a creditor or merchant, given the choice, will be willing to accept payment by a mechanism unless he is relatively certain that he will be able to convert the instrument into cash. Thus, to illustrate the rights of the holder, this paper will discuss the possibility that the holder or payee may not be able to recover the amount of cash to which he is entitled. This depends primarily on the likelihood that the instrument or payment mechanism will be returned because of insufficient funds or because of a stop payment order.(174)

Inextricably linked to the rights of the holder are the rights of the payor. In particular, if the payee or holder is protected from the possibility of a stop payment order, the payor’s right to protect himself or herself in the event of an error are attenuated. Both the rights of the payee or holder and the payor also are affected by the certainty and adequacy of legislative provisions governing the respective payment mechanisms. Therefore, these provisions will also be discussed.

Second, in order to evaluate the extent to which checks, wire transfers, and payment cards further the cause of combatting money laundering, this article will examine the ability of these payment mechanisms to facilitate identification of parties to payment transactions, and of sources of funds. Thus, this analysis will discuss the quality and quantity of records maintained with respect to transactions employing these payment mechanisms.

ANALYSIS OF ALTERNATIVES TO CASH

Checks

One of the cash alternatives explicitly mentioned in Recommendation 25 of the Financial Action Task Force on Money Laundering Report(175) is the check. It is the means of payment used most commonly by consumers in the United States.(176) A check is a bill of exchange drawn by a bank’s customer upon funds in the customer’s account at the bank and payable on demand.(177) In the United States, checks are governed by Articles 3 and 4 of the Uniform Commercial Code, and by the federal Expedited Funds Availability Act.(178) In Canada, it is the Bills of Exchange Act that governs checks, especially sections 164 to 175.(179)

During clearing and settlement,(180) the obligations of parties are affected by the presenting and paying banks.(181) Thus much of the holders’ and payors’ risks lie in circumstances beyond their control. The payor’s rights are protected to the extent that both the U.C.C. and the Bills of Exchange Act specify the bank’s obligation to prevent erroneous processing of a check. In the U.C.C. the standard of care is specified to be “ordinary care,”(182) whereas in the Bills of Exchange Act, it is that of “good faith without negligence.”(183) Moreover, a drawer whose signature has been forged(184) generally is not liable on the instrument unless he is estopped from setting up the defence of forgery.(185) In addition, the drawer has the ability to order the drawee to stop payment on the check before it has been negotiated by the payee or endorsee to the drawee.(186) However, where the payee’s name has been forged, the drawer is liable if the payee’s name has been made up.(187)

One risk borne by the holder of a check is that a signature (as opposed to the payee’s name) may be forged.(188) Another is possible insolvency of the drawee.(189) The primary risks to the holder of a check are that the check may be returned because there are insufficient funds in the drawer’s account or that a stop payment may be issued against the check before the holder cashes it. Indeed,

frequently, sellers are unwilling to accept payment by personal [check] because of the risk of insufficient funds or a stop payment order. If a stop payment order is used, the seller may have to instigate substantial litigation in order to collect its money.(190)

In the event of either insufficient funds or stop payment, the holder’s ability to recovery from the parties liable on the check will be determined by the status of the holder.

The holder of a check may be a mere holder, a holder for value, or a holder in due course.(191) If a check has been issued as payment, the payee’s or endorsee’s rights to recover on the check will depend on his status as holder. The mere holder is a person in possession of a validly negotiated instrument(192) and has the power to negotiate the instrument to some other party,(193) to receive payment, and to give a valid discharge to the payee.(194) However, if the mere holder is not a holder for value, he does not have the power to sue on the instrument in that he may be met with the defense of lack of consideration. A holder becomes a holder for value if he or someone before him(195) gives consideration, and every holder is presumed to be a holder for value.(196)

The type of holder that has greater ability than the holder for value to sue on an instrument free from defects is the holder in due course.(197) Section 73 of the Bills of Exchange Act in Canada states that a holder in due course “may enforce payment against all parties liable on the bill.” In order to qualify as such, a holder usually must meet seven criteria.(198)

Nonetheless, the payor’s ability to countermand payment puts him in a strong position in that he may force the seller to choose between pursuing court action and satisfying his complaints. Indeed,

an unscrupulous buyer may use such procedures to postpone payment till a much later date after prolonged litigation. Such tactics may also force the seller to settle the dispute early and give the buyer substantial discount so as to avoid a lengthy court battle.(199)

Thus, while checks are physically convenient, in the absence of assurances provided by such variations as certified checks or teller’s checks, they are unlikely to be widely acceptable as cash alternatives because of the risks required to be undertaken by the payee or endorsee.

Certified Checks

Certification substantially reduces the risk to the holder that the check will be returned because of insufficient funds or that the payor will issue a stop payment order. A check that is certified shows that (1) it has been drawn by the person indicated as doing so, (2) the account upon which it purports to have been drawn exists with the drawee, and (3) there is enough money in the account to meet the requirements of the instrument.(200)

In the United States, upon certification of the check, the bank is authorized to charge the customer’s account for the amount of the check

Thus, a holder in due course of a certified check has substantially more certainty than a holder of an uncertified check that he does not risk non-payment due to insufficient funds in the drawer’s account or because of the issuance of a stop payment order by the drawer. Hence, if regulators are to choose which non-cash transactions to encourage pursuant to the Recommendation of the Financial Action Task Force, their attributing a higher priority to certified than to non-certified checks would afford greater protection of holders’ interests.

On the other hand, the rights of the payor are attenuated in that the drawer’s rights to change his mind about payment after a certified check has been procured are substantially restricted. As indicated by the United States Uniform Commercial Code, one reason for this is to protect the credit rating of the drawee:

There is no right to stop payment after certification of a check or other acceptance of a draft. The acceptance is the drawee’s own engagement to pay, and it is not required to impair its credit by refusing payment for the convenience of the drawer.(204)

Thus, although the seller of goods or services may be more willing to accept a certified check than a non-certified one, it may be less acceptable to the buyer as an alternative to cash. Nonetheless, given the risks of loss and theft, the drawer may be more willing to use a certified check, given the choice between cash and a certified check when the seller has eliminated the third choice of a personal check. Even though the buyer may have to go to the lengths of providing a bond of indemnity in the event that the certified check is lost,(205) the probability of being called upon the indemnity would be less than that of lost or stolen cash being spent.

Money Orders and Cashier’s Checks

Money orders and cashiers’ checks are similar to certified checks in that they enhance the rights of the holder. Although money orders and cashier’s checks do not fall within the legal definition of money, they do serve in some circumstances as alternatives to cash.(206) Indeed, cashier’s checks in the United States are received as cash because the banks stand behind them.(207) Thus, United States courts have held that there is a public policy reason for prohibiting the stopping of payment once a cashier’s check is issued, and for restricting the defenses of which the bank may avail itself, even against holders who are not holders in due course.(208) Similarly, money orders are accepted as readily as cashier’s or certified checks because they are backed by the credit of the issuing institution

Conversely, the rights of the payor of a cashier’s check are curtailed. Pursuant to the Uniform Commercial Code in the U.S., because a cashier’s check is payable from the bank’s and not the customer’s account, the customer does not have the right to stop payment on it.(210) Moreover, U.S. courts have held that it is beyond the power of the bank to stop payment on a cashier’s check after the check has been issued because such a check is accepted when it is issued.(211) Thus, the remitter’s right to change his mind about paying after the cashier’s check has been issued is substantially less than that of the drawer of a personal check.

Teller’s Checks

The teller’s check(212) and the cashier’s check have been said to be similar both in appearance and in function.(213) The holder of a teller’s check is protected from the risk of stop payment in much the same way as the holder of a cashier’s check. In the United States, it has been held that the payment of a teller’s check may not be stopped by the purchaser of the check.(214) The public policy reason for such an approach is that “a teller’s [check] has generally been treated as ‘cash'”.(215) The U.S. courts have also held that the bank should not be able to stop payment on a teller’s check.(216) Thus, the payor has little, if any, ability to stop the payment of a teller’s check once it has been issued if the payor simply changes his mind about payment.

Moreover, the holder of a teller’s check is also protected from dishonor of the instrument on the basis of insufficient funds. In the United States it has been held that

[t]eller’s [checks] are obviously more secure, if duly authorized, than most personal [checks], as the resources of the bank are available for payment with the result that, except in a case of a bank failure, there is no problem of a teller’s [check] being dishonored for insufficient funds.(217)

Thus, a holder of a teller’s check has greater rights than the holder of a personal check that has not been certified.(218)

Traveler’s Checks

Holders of traveler’s checks(219) are also afforded greater protection from the risk of stop payment orders than are holders of personal checks.(220) Generally, the party who pays with traveler’s checks is entitled to a refund from the issuer only if he has been a victim of theft or loss. Therefore, in most cases, this would not extend to circumstances in which the payor had simply changed his mind about making the payment. However, in at least one case, a U.S. court construed the definition of theft to encompass payment by a 75 year-old man for an empty package.(221) Moreover, major issuers of traveler’s checks include in their contracts express provisions that the issuer will not be obliged to stop payment for any reason.(222) Clearly, the rights of the party paying with traveler’s checks are not as broad as those of a party paying with personal checks.

Holders of traveler’s checks also are protected from the risks of insufficient funds and theft. Traveler’s checks were originally intended to be negotiable instruments that would be accepted almost as readily as currency but which would be protected against loss.(223) Thus, the courts in the United States have held that holders in due course must be paid when they present traveler’s checks to the bank if the checks have been properly signed, countersigned and transferred.(224) Therefore, the U.S. courts have held the holder in due course to be entitled to payment even if the traveler’s checks had been stolen before being signed,(225) if the bank knows that the checks have been stolen,(226) if the issuer suspects that the claimant alleging loss of the checks has been fraudulent,(227) and if blank checks had been stolen from the selling agent’s safe.(228) Indeed, because of commercial practice, the holder in due course is put in a better position than such a holder of personal checks. Issuers of traveler’s checks honor forged traveler’s checks if the holder has acquired them in good faith and for value.(229)

Combatting Money Laundering

The encouragement of payment by simple,(230) certified, or traveler’s check in lieu of cash, would assist in combatting money laundering because, normally, the payors are identified. Generally, in the case of simple or certified checks, the payor is identified because it is necessary for the payor to own a bank account with the drawee. With respect to traveler’s checks, there is significant record-keeping. Serial numbers are used to identify them in case of loss or theft, and the true owner is identified at the time the traveler’s checks are purchased because he is required to sign the checks for the purpose of matching them with the countersignature.(231) Therefore, if these three types of payment mechanisms were encouraged, detection of money laundering transactions would be facilitated except in cases in which the money laundering payor falsified his identity.

On the other hand, encouragement of the use of cashier’s checks, money orders, or teller’s checks as alternatives to cash probably would not contribute significantly to the fight against money laundering because payors may avoid identification easily. The remitter of a cashier’s check does not need to be a customer of the bank,(232) just as a money order may be issued to a person who is not the issuing institution’s customer.(233) Moreover, the institution issuing a money order generally does not record the purchaser’s identity:(234)

[a]lthough banks and the Post Office keep some records of cashier’s checks and money orders, the documentation is minimal. Postal money orders and cashier’s checks are the most flexible and anonymous form of property. In fact, postal money orders became so popular that in August, 1987, the Postal Service imposed a temporary ceiling on sales of money orders to $10,000 per person per day.(235)

Indeed, “[p]ostal money orders and cashier’s checks are the launderers’ instruments of choice.”(236)

Thus, although the encouragement of certified checks and traveler’s checks as alternatives to cash would have both positive effects of protecting holders from risks of insufficient funds and stop payment orders, and facilitating the fight against money laundering, participants in the laundering enterprise have chosen the cash alternatives that protect holders from risks, while permitting anonymous conduct of the laundering activities. Moreover, “many sellers insist on payment in the form of a certified [check], cashier’s [check], teller’s [check] or bank money order.”(237) It appears, therefore, that encouragement of certified checks as alternatives to cash would meet the dual objectives of aiding the fight against money laundering and meeting the requirements for broad acceptance. Nonetheless, there may be other payment mechanisms that could be more successfully encouraged as alternatives to cash pursuant to Recommendation 25 of the Financial Action Task Force.

Wire Transfers

With the development of electronic media that has propelled the wire transfer system(238) into prominence,(239) the wire transfer system appears to be a promising contender for the role of alternative to cash.(240) Payment by wire transfer is quick and reliable,(241) and a wire transfer system may be used in both domestic and international transactions to communicate directions to transfer value.(242)

However, the rights of neither the holder nor the payor in a wire transaction are secure because the law concerning the rights and obligations of the parties to a wire transfer payment transaction is uncertain.(243) The Electronic Fund Transfer Act is inapplicable because wire transfers are “not designed primarily to transfer funds on behalf of a consumer.”(244) Moreover, although Article 4A of the Uniform Commercial Code provides a framework to resolve disputes,(245) there is no federal law in the United States that comprehensively governs wire transfers.(246) Three federal courts of appeal in the United States have held that the Uniform Commercial Code does not apply to wire transfers on the ground that a wire transfer does not fall within the definition of “item.”(247)

Although it has been suggested that the payor is protected by the laws of agency,(248) there is no consensus that agency law applies.(249) In addition, it has not been decided with finality whether payment by wire transfer can be stopped once the funds have become available to the beneficiary,(250) and the liability in negligence of a transmitting bank has not been set out decisively in English law.(251) Courts have not treated the issue of finality of payment consistently, and cases have not addressed a significant number of issues including mistaken instructions, erroneous transmission, and loss allocation.(252) Such uncertainty is not mitigated by the suggestion that the law applicable to these payment mechanisms is likely to develop by analogy to negotiable instrument law.(253)

More importantly, it is probably the lack of comprehensive regulation that renders wire transfer systems inadequate alternatives to cash in the fight against money laundering. Wire transfers are the principal method by which large volumes of money are laundered,(254) and this prevalence of the wire transfer as a money laundering vehicle may be explained by the fact that no international regulations apply to wire transfers that extend across national borders.(255) For example, payment instructions for wire transfers from foreign banks frequently do not include the names of customers upon whose behalf the banks are acting.(256) Indeed, “[e]ven the most sophisticated reporting systems for domestic deposits of currency can be rendered ineffective by the relatively simple expedient of laundering the drug-oriented funds out of the country.”(257) Thus, if the encouragement of non-cash transactions were to extend to wire transfers in the fight against money laundering, there would have to be significant improvements to control, monitoring, and regulation, particularly at the international level.

Payment Cards

Credit cards are valid only at those establishments that have agreed to honor them. Thus, their acceptance as a means of payment is unlikely to be as widespread as the acceptance of cash.(258) Nonetheless, the credit card generally provides assurance to the merchant accepting it that he will be paid under an agreement with a bank or issuer.(259) The rights of the payor, however, are less certain.(260) Although the payor in the case of a vendor-based card may assert against the card-issuer any defenses that may be asserted against the merchant,(261) in the case of lender-based credit cards, the question of whether the cardholder can assert defenses against the card-issuer depends on whether the lender’s rights arise from a loan or assignment.(262)

Nonetheless, both Article 4 of the Uniform Commercial Code(263) and Article 4A exclude credit and debit card slips from the definition of “item.” Also, neither a credit card nor a credit card slip is likely to meet the requirements of a negotiable instrument.(264) Thus any protection of the rights of consumer cardholders must be derived from sources other than those governing negotiable instruments. In the United States, in addition to the Electronic Fund Transfer Act that protects the interests of consumers using electronic means of payment,

the Truth in Lending Act(265) governs credit card transactions. However, in Canada, “[n]o provincial statute addresses itself specifically to the availability of cardholder’s contract defenses against third party credit card issuers.”(266) Despite the provision of contractual terms and case law that provide the cardholder with defenses, the lack of a comprehensive regulatory framework in Canada governing credit cards renders the ordinary consumer vulnerable to manipulation by sophisticated and powerful card-issuers.

Similarly, the interests of debit cardholders in Canada are at risk. Geva identifies five areas in which the debit cardholder’s position is vulnerable: “disclosure and billing practices, countermand of payment, liability for unauthorized use of the card, recovery of loss resulting from communication breakdown, and dispute resolution.”(267) Another weakness of the debit card payment system is the threat that electronics funds transfer systems pose to customers’ privacy. In addition, the possibility of errors increases with computerization.(268) Indeed, fraud perpetrated by unauthorized use of a payment card or prohibited manipulation of computer systems may be even more difficult than error to detect and prove.(269) Further, consumers’ interests need to be protected with proof of payment having adequate evidentiary value.(270) For example, it may be particularly difficult to verify the authenticity of a payment instruction if the signed sales draft cannot be retrieved.(271)

Also, there is the possibility that an erroneous debit will be made from the cardholder’s account and that, as a result, insufficient funds will remain in the account to pay for an instrument properly charged. On-line debits are possible,(272) and if the non-bank is provided direct access to the cardholder’s account,(273) the cardholder’s risk may be substantial, particularly if the cardholder is liable for card use that he has not authorized. Funds are removed from the debit cardholder’s account before the issuer satisfies itself that the payment instruction is authentic.(274) In effect, therefore, in Canada the cardholder of a paper-based debit card does not have the right to stop payment. Indeed, “it is almost universally accepted that once authorization is given, or at least communicated to the terminal, a debit card payment to a merchant cannot be countermanded.”(275)

However, it is precisely this deficiency in the debit cardholder’s right which secures an advantage for the payee: the payee generally is assured at the time of the transaction that he will receive payment.(276) For example, if the card is an EFT debit card and is a second-generation card such that the card issuer authorizes the payment direction on-line, regardless of the timing of the adjustment to the debit cardholder’s account, the on-line authorization transmitted by the issuer assures the merchant of payment.(277) The merchant also does not assume the risk of “NSF” items if he has access to the cardholder’s account. Thus, it is to the payee’s advantage that the debit cardholder’s right to countermand payment is deficient. Moreover, the extended right of the cardholder to countermand payment on a debit card “would be inconsistent with the finality of the debit card payment, that is, to its assimilation to payment in cash.”(278)

The debit cardholder is further disadvantaged in Canada by deficient regulation. There is no comprehensive legislation in Canada governing debit card transactions.(279) Therefore, the rights of the cardholder are not clear.(280) Moreover, given the asymmetry of power between the financial institution and the consumer, it is unlikely that the contractual provisions governing debit cards will provide substantial protection of the consumer’s interests in the absence of legislation. In order to protect Canadian consumers, legislators will have to intervene to correct the imbalance of power. If the use of debit cards expands but legislation in Canada is not introduced to protect adquately the interests of consumers, consumers most likely will become inadvertent victims of implementation of the Financial Action Task Force recommendation to encourage non-cash transactions.

A valuable precedent for the protection of consumers’ interests is the Electronic Fund Transfer Act(281) of the United States which addresses consumers’ rights and champions the causes of social equity and economic efficiency.(282) In its application to debit card transactions, the Electronic Fund Transfer Act(283) in the United States establishes procedures to resolve errors,(284) limits liability for unauthorized transfers, and orders banks to make disclosures.(285) The Electronic Fund Transfer Act has been criticized for failing to address adequately the issue of privacy, and for the presence of loopholes with respect to liability.(286) Nonetheless, the United States Electronic Fund Transfer Act overall is quite successful in achieving the objectives of social equity and economic efficiency in addressing the need to protect the rights of consumers.(287) Canadian legislators may find that the American law provides a useful precedent.

Combatting Money Laundering

Access to payment cards is restricted to those people who have firm financial support.(288) Therefore, those who do not have the resources to obtain these payment mechanisms may be forced to resort to cash. Hence, if the intent of discouraging cash transactions is to facilitate detection of money obtained through illegal sources, people may become unjustly the focus of suspicion simply because they cannot afford to acquire payment cards. In addition, there are a number of risks borne by the payment cardholder, including that of invasion of privacy.(289)

Ironically, however, the threat to the cardholder’s privacy is actually beneficial from the perspective of combatting money laundering. Payment card transactions are significantly better documented than cash transactions. Generally, payment cards facilitate the fight against money laundering through identification of the payor cardholder. For example, usually, the debit cardholder requires an account from which funds are debited. Thus, in the absence of fraud, it is difficult to conceal the identification of at least one party to the payment transaction. Electronic funds transfer systems are centralized computer systems that can provide access to all the financial information of an individual. Indeed, “[t]he RCMP and the FBI have interconnections to provide each other with data.”(290) Therefore, use of payment cards as an alternative to cash would facilitate tracing of transactions which would help to identify the sources of funds. This would impede the ability of money launderers to escape or to assist others evade the consequences of the illicit activities by which the funds laundered were obtained.(291)

THE MOST EFFECTIVE ALTERNATIVE TO CASH: THE DEBIT CARD

A comparison of the rights of payees and payors with respect to payments made by cash and alternatives indicates that cash protects the payee’s rights the most and the payor’s interests the least. However, cash is less physically convenient than checks, wire transfers, and payment cards.

From the payor’s point of view, cash payments and debit cards provide the lowest level of protection. Based on the principle of currency, the cash payor would have to establish that the payee was not bona fide in order to raise the possibility of obtaining return of cash. Similarly, the debit cardholder’s rights are limited primarily to the extent that funds are transferred immediately to the payee. On the other hand, a payor who uses a check that has not been certified has the broadest right to stop payment. This right, however, is substantially reduced when payment is made by certified check, cashier’s check, money order, teller’s check, or traveler’s check. There is greater uncertainty with respect to the payor’s right to stop payment as it applies to wire transfers and credit card payments. Thus, the encouragement of checks as alternatives to cash would afford the greatest protection to payors. However, the debit card is more physically convenient than checks.

Indeed, from the payee’s perspective, the debit card would be the most favorable alternative to cash. The debit card affords the second best level of comfort when judged by the standard set by cash. Generally, once cash is delivered to a bona fide holder for value, title passes and the payor cannot recover it. However, the risks borne by the holder of a check include forgery of a signature, insolvency of the drawee, issue of stop payment, or return on the grounds of insufficient funds. Although the variations that characterize certified checks, teller’s checks, cashier’s checks, money orders, and traveler’s checks provide substantial assurance to the payee that payment will not be frustrated by insufficient funds or by a stop payment order, the debit card provides greater comfort in that the funds may be transferred immediately such that the payee is not even subject to the risk of insolvency of an intermediary institution. Moreover, the credit card transaction submits the payee to the risk of the issuing institution’s credit worthiness, and the rights of a payee in a wire transfer are relatively uncertain because of inadequate regulation.

Thus, on balance the debit card appears to be the alternative to cash capable of becoming most broadly accepted. Clearly, payees’ interests are protected more by the debit card than the other alternatives to cash discussed, and although the interests of payors are better protected by check payment than by debit card payment, debit cards are more physically convenient than checks.

Combatting Money Laundering

Moreover, payment by debit card contributes more to fight against money laundering than does payment by cash, cashier’s check, teller’s check, money order, or wire transfer. Encouragement of the use of cashier’s checks, money orders, or teller’s checks as alternatives to cash probably would not contribute significantly to the fight against money laundering because inadequate transaction records are maintained and payors may avoid identification easily. In addition, it is probably the lack of comprehensive regulation that renders wire transfer systems inadequate alternatives to cash in the fight against money laundering. Payment card transactions are significantly better documented than cash transactions. Electronic funds transfer systems are centralized computer systems that can provide access to all the financial information of an individual.(292)

The encouragement of payment by simple,(293) certified, or traveler’s check in lieu of cash, would assist in combatting money laundering because, normally, the payors are identified, either because the payor must own a bank account or, in the case of traveler’s checks, the payor signs the check at the time he purchases the check. However, it probably would be more efficient and less expensive to trace payments made by debit cards than by checks. The banking community prefers magnetic tape to checks because checks are more expensive and cumbersome to process.(294) Moreover, electronic funds transfer systems facilitate the tracing of transactions such that the source of funds may be determined through an audit.(295) Thus, the debit card is more efficient than checks, money orders, or wire transfers in assisting the fight against money laundering.

Possible Manipulation to Conceal Trail of Payment

Although the debit card is the most effective alternative to cash, there is sufficient similarity between the debit card and the goldsmith’s note(296) to suggest that in the long term, the debit card may evolve into plastic money just as goldsmith’s receipts evolved into paper money accepted as legal tender.(297) Such an evolution of the debit card into cash would reduce the ability of the debit card to assist the fight against money laundering because the debit card could then be used to transfer funds without revealing the identity of the payor.

Even in the short term, debit cards could become traded in lieu of the underlying paper money, just as paper money (the goldsmith’s note) began to be traded instead of the underlying coins three centuries ago. For instance, cardholders may devise methods to use the debit card as money itself to transfer title in the debit card as payment of an amount equal to the funds in the underlying account. Thus, even though the identity of the original owner of the funds in the account debited by a debit card transaction may be difficult to conceal, money launderers may be able to use the debit card to conceal the path followed by the funds.

ANALYSIS OF RECOMMENDATION TO ENCOURAGE NON-CASH TRANSACTIONS

Attempts to combat money laundering are based on the premise that the source of the money is harmful to society. Thus, it must also be assumed by those propounding the combatting of money laundering that by making it more difficult for criminals to absorb the proceeds from their activities into their lifestyles, they will be forced or at least encouraged to choose legal activities that provide greater benefits to society.

However, even if it is assumed that the elimination of money laundering is possible, it is difficult to conceive that criminals will respond by behaving in legally and socially acceptable manners. To the contrary, it seems more likely that the result of eliminating money laundering will simply be to force those who obtain or dispose of money illegally to find other undetectable means of doing so.

For instance, it has been noted that ”'[a]s we move into an increasingly cashless society, drug traffickers are trying to find more people, or smurfs, who will succumb to temptation and help them launder their money.”'(298) Moreover, given the dearth of regulation in Canada of electronic payment devices, it is undoubtedly possible for criminals themselves to devise deceptive schemes of non-cash payment that are as difficult to trace as cash transactions are. Although such U.S. legislation as the Electronic Fund Transfer Act(299) and U.C.C. Article 4A address electronic payment mechanisms, they are directed at defining the relationship between the parties to such transactions, rather than at limiting the scope of transactions that may be undertaken. Indeed, “the high-volume launderers, headquartered in centers such as Miami or South and Central America, have perfected the electronic wire transfer to shift huge blocks of drug money in seconds. They are smarter and greedier than before.(“300) Moreover, at the “retail” level of such transactions, it is quite possible that the “merchants” and “consumers” will begin to exchange the debit card, just as merchants and consumers in the seventeeth century began to treat goldsmiths’ notes as money.

Thus, the true motivation for combatting money laundering may derive from the unacceptable sources of the money laundered. If so, it may be more efficient and effective to direct resources at eliminating the sociological, psychological, and other reasons why people choose to obtain or dispose of their money illegally in the first place. Otherwise, regulators may have to respond to criminals’ efforts to skirt attempts to combat money laundering, just as legislators were compelled to introduce laws to thwart the activities of smurfs who had developed ways to circumvent mandatory reporting requirements. Indeed, after the U.S. Congress passed the statute in 1970 requiring financial institutions to report cash transactions over $10,000, innovative criminals succeeded in circumventing detection by structuring cash transactions just below the limit, for example in two blocks of $9,900 instead of one of $19,800. Congress was then forced to introduce another law making it a crime to structure transactions in this manner.(301)

Apart from the questionable deterrent effect of such a response, the chain of action, reaction, and counter-reaction could continue ad infinitum. Ultimately, the government may intervene to control the issuance of debit cards, just as the State usurped private institutions’ power to issue goldsmiths’ notes, more than 200 years after the emergence of those payment mechanisms.(302)

On the other hand, the counter-argument to this position is that other methods to combat illegal activity have failed. “Recognizing that ordinary tactics, such as arrests, drug seizures, interdictions, and voluntary compliance have failed in the ‘war on drugs,’ the government has opened a major new front where the principal armaments are computer terminals and artificial intelligence rather than guns and goons.”(303) Moreover, it has also been asserted that “foreclosing the opportunity to launder drug dollars can substantially decrease the quantity of drugs imported and sold”.(304) In any event,

[f]ighting money laundering is the most meaningful contribution that the banks can make to the war on drugs. It is something the banks are well equipped to do. It is the one area where members of the financial community can make a difference. Effective anti-money laundering measures make it tougher for criminals to get their dirty money into the financial system.(305)

Thus, while the fight against money laundering may go some way towards helping alleviate significant problems within the international community, it is clear that the illegal activities underlying money laundering can be solved, if at all, only after resources have been directed through other channels to attack the sociological, psychological, and other causes of these problems. Indeed, the convening of the Financial Action Task Force on Money Laundering was only one of a number of resolutions formulated at the fifteenth Economic Summit.(306) Obviously.

money laundering is just one of the fronts on the war on drugs. And success on that front alone will not solve the drug problem. Equally important are law enforcement, education, prevention and treatment. But the money laundering front is the front where all those participating in the commercial side of the cash economy [can fight most effectively].(307)

CONCLUSION

Regulators has recognized the role of financial transactions in supporting illegal drug and other criminal activities. Some of the progress made on this front includes Canadian and, particularly, U.S. legislation permitting the seizure of funds and property derived from money laundering. In addition, encouragement of such alternatives to cash as the debit card and other payment mechanisms may help facilitate the detection of money laundering activities, thereby impeding efforts of criminals to profit from their illegal activities.

However, money launderers also may benefit from the advancement of cash alternatives. Both regulators and criminals perceive a need to shun cash and devise non-cash alternatives. While regulators such as the Financial Action Task Force are averse to cash because it facilitates concealment of the illegal source of cash, criminals dislike the inconvenience of processing large volumes of cash. Indeed, money launderers are likely to devise more sophisticated means of concealing the sources of their funds. Already money launderers use cashier’s checks and postal money orders, and it is possible that they also will formulate methods using debit cards and other payment mechanisms recommended by the Financial Action Task Force as alternatives to cash.

Thus, the recommendation to encourage non-cash transactions may have little effect in impeding money launderers. Moreover, it is ironic that although regulators who support the multinational Financial Action Task Force recommendation to encourage non-cash transactions are motivated to do so by the objective to protect society from the adverse effects of such illicit activity as drug trafficking, the inadvertent effect may be to subject consumers within that society to manipulation by the stronger and more sophisticated financial institutions that write the contracts governing such non-cash alternatives as debit cards. This is particularly the case in Canada, where there is a lack of legislation protecting consumers who use such payment mechanisms as debit cards.

In contrast, U.S. legislators have produced the Electronic Fund Transfer Act which has significantly reduced the risk that U.S. consumers will become inadvertent victims of the Financial Action Task Force recommendation. Although there are some shortcomings of the Electronic Fund Transfer Act, it defines rights and obligations and protects the concerns of consumers in a manner that balances the interests of both consumers and financial institutions. Thus, while there is room for Canadian and other legislators to improve upon some of the provisions of the Electronic Fund Transfer Act, this United States Act would serve very well as a model upon which legislators around the world could base laws to ensure that consumers do not inadvertently become victims of the Financial Action Task Force recommendation to encourage non-cash transactions.

(1) Sarah N. Welling, Smurfs, Money Laundering, and the Federal Criminal Law: The Crime of Structuring Transactions, 41 FLA. REV. 287, 292 (1989).

(2) Evan Thompson, Dirty money in Canada: our banks’ proactive stand, 97 CANADIAN BANKER, Mar.-Apr. 1990 at 6, 7.

(3) Council Directive 91/308, 1991 O.J. (L 166) 77. 78.

(4) The multilateral Financial Action Task Force analyzed current and proposed additional ways to combat money laundering internationally. It was convened by the G-7 as a result of concern about the magnitude of money laundering recognized at the fifteenth annual Economic Summit in Paris in 1989. FINANCIAL ACTION TASK FORCE ON MONEY LAUNDERING, REPORT 1 (1990) [hereinafter FATF].

(5) 15 U.S.C [unkeyable] 1693-1693(r) (1988).

(6) Id.

(7) FRITZ ALEXANDER MANN, THE LEGAL ASPECT OF MONEY 8 (4th ed. 1982).

(8) Benjamin Geva, From Commodity to Currency in Ancient History-On Commerce, Tyranny, and the Modern Law of Money, 25 OSGOODE HALL L.J. 115 at 117, 144 [hereinafter From Commodity].

(9) Indeed, money is excluded from the definition of “goods” in Section 1(h) of the Sale of Goods Act of Alberta: ”’goods’ includes … all chattels personal other than things in action or money ….” R.S.A. 1980, c. S-2. This exception is also found in England, the United States, and Ontario.

(10) From Commodity, supra note 8, at 117, 144. See also Margaret Samuel, “Money May Not Stink But Cash Does: Alternatives to Cash Transactions in the Fight Against Money Laundering,” 7 J. INT’L BANK L. 274 (1992).

(11) Miller v. Race, 1 Burr. 452, 97 Eng. Rep. 398 (1758).

(12) For discussion of the holder in due course of money, see MANN, supra note 7, at 9-13.

(13) Id. at 8-22.

(14) Benjamin Geva, The Concept of Payment Mechanism, 24 OSGOODE HALL L.J. 1, 6-7 (1986) [hereinafter Concept]. See also Banque Belge v. Hambrouck, 1 K.B. 321, 329 (1921).

(15) 1 Ld. Raym. 743 at 744, 91 Eng. Rep. 1397 at 1398 (1696).

(16) MANN, supra note 7, at 7. See also Case de Mixt Moneys, Davis, 18, 19 (1604)

(17) The term “giro account” has been used to refer to transfers

(18) MANN, supra note 7, at 6-7. See also Banque Belge v. Hambrouck, 1 K.B. 321, 329 (1921).

The law’s recognition of the creditor’s right to resist payment by certain chattels probably stems from the risk of the maker’s insolvency. Indeed, the existence of a “conditional payment” principle at the beginning of the eighteenth century underscored the significance of the risk that the maker could become insolvent.

[T]his principle stated that unless agreed otherwise, “the acceptance [by a creditor] of a [goldsmith’s] note is not acutal payment.” Rather, “when such a note is given in payment, it is always intended to be taken under his condition, to be [absolute] payment [only] if the money be paid thereon.” That condition was dispensed with upon the creditor’s failure to demand payment from the goldsmith “in convenient time.” Stated otherwise, the “conditional payment” principle meant that upon the goldsmith’s failure, the creditor was entitled to recover from the debtor, provided that a timely demand from the goldsmith had been made by the creditor. From Commodity, supra note, 8, at 148.

(19) See, e.g., United States v. Heyman, 794 F.2d 788 (2d Cir.) cert, denied, 479 U.S. 989 (1986)

(20) See, e.g., United States v. Dela Espriella, 781 F.2d 1432 (9th Cir. 1986), and J.R. Rep. No. 975, 91st Cong., 2d Sess. 11 reprinted in 1970 U.S.C.C.A.N. 4394, 4396.

(21) Welling, supra note 1, at 290.

(22) Id.

(23) Thompson, supra note 2, at 6.

(24) Id.

(25) Welling, supra note 1, at 291.

(26) CANADIAN BANKERS’ ASS’N, DIRTY BUSINESS: MONDEY LAUNDERING AND THE WAR ON DRUGS: NOTES FOR REMARKS BY HELEN K. SINCLAIR, PRESIDENT, THE CANADIAN BANKERS’ ASS’N TO THE CANADIAN CLUB 12 (February 19, 1990).

(27) Welling, supra note 1, at 290.

(28) Id. at 292.

(29) Id.

(30) Id.

(31) Steven Wisotsky, Exposing the War on Cocaine: The Futility and Destructiveness of Prohibition, 1983 WIS. L. REV. 1305, 1333.

(32) Id.

(33) “Efficient laundering renders the underlying crime lucrative, and therefore perpetuates it.” Welling, supra note 1, at 291.

[Moreover, a]ny law enforcement officer will tell you the drug problem is the major challenge facing police today, and the major source of urban crime — armed robbery, prostitution, mugging — as victims of drug abuse turn to desperate measures to finance their addictions. It is a problem for our health care system, our social agencies, our schools, our work forces and our families. At its worst extreme, the drug trade — with its huge economic power — can undermine the most basic institutions of a society — its legal system and political system, to say nothing of its financial system. Think about Colombia. Think about it. CANADIAN BANKERS’ ASS’N, supra note 26, at 4-5.

(34) Lutz Krauskopf. Comments on Switzerland’s Insider Trading, Money Laundering, and Banking Secrecy Laws, 9 INT’L TAX & BUS. LAW., at 277 (1991).

(35) Id.

(36) Welling, supra note 1, at 292 n.23.

(37) CANADIAN BANKERS’ ASS’N, supra note 26, at 4.

(38) Thompson, supra note 2, at 8.

(39) Id. at 6.

(40) R. Gustav Niebuhr & Glenn Ruffenach, Calls by Juror to Drug Cartel Figures Almost Derail Money-Laundering Trial, WALL ST. J., July 27, 1990, at B5.

(41) Thompson, supra note 2, at 8.

(42) Swiss Ban on Laundering Money to Go Into Effect, WALL ST. J., July 31, 1990 [hereinafter Swiss Ban].

(43) Monetary Transactions Act, Pub. L. No. 91-508 [unkeyable] 221-23, 84 Stat. 112 (1970) (codified as amended at 31 U.S.C. [unkeyable] 5313(a) (1988)).

(44) 31 U.S.C. [unkeyable] 5322 (1988).

(45) Money Laundering Control Act of 1986, tit. I, subtit. H of the Anti-Drug Abuse Act of 1986, Pub. L. No. 99-57, 100 Stat. 3207 (1986) (condified as amended throughout 18 U.S.C. and 31 U.S.C.).

(46) Gail DeGeorge & Tim Smart, Grabbing Dirty Money — And Horses, Yachts, Planes, Cars . . . BUS. WK., June 4, 1990, at 152.

Although the United Kingdom also has legislation (Drug Trafficking Offences Act,

1986 ch. 32 (UK)) providing for the seizure and forfeiture of assets derived from the illicit traffic of drugs, this American practice was extended only to criminal and not to civil law. William C. Gilmore, International action against drug trafficking: trends in United Kingdom law and practice through the 1980’s, 17 COMMONWEALTH L. BULL. 287, 301 (1991).

(47) Anti-Drug Abuse Act of 1988, 21 U.S.C. [unkeyable] 1501 (1988). See also Charles A. Intriago Money Laundering: New Penalties, Risks, Burdens for Bankers, THE BANKERS MAG., Mar.-Apr. 1990, at 50, 55.

(48) However, representatives of Canadian banks find this description “irritating and untrue.” Thompson, supra note 2, at 8.

Indeed it has been asserted that “the anti-money laundering system evolving in Canada is superior to the American system.” One of the primary differeces between the American and Canadian approaches has been the absence in Canada of the requirement in the United States that cash transactions exceeding $10,000 be reported to the government. The Proceeds of Crime Act was proclaimed in force October 1, 1991. S.C. 1991, c.26. Regulations under this Act are expected to be in force in late 1992. The Regulations as proposed in June 1992 require that transactions of $10,000 or more be recorded, but not reported. Proposed Proceeds of Crime Regulations, Canada Gazette Part 1, June 13, 1992, p. 1742.

(49) Brian O’Brien, Banking is news

(50) This includes training programs. Michael Ballard, On the safe side

(51) Helen Sinclair, Battling dirty business, 97 CANADIAN BANKER, May-June 1990, at 6, 7.

(52) Thompson, supra note 2, at 7.

(53) Sinclair, supra note 51, at 7.

(54) Id.

(55) Id.

(56) Ballard, supra note 50, at 45.

(57) Sinclair, supra note 51, at 7

(58) Criminal Code, R.S.C., ch. C-46, Part XII.2 (1985) (Can.).

(59) Subtit. H of tit. I of the Anti-Drug Abuse Act of 1986, Pub. L. No. 99-570, 100 Stat. 3207 (1986) (codified as amended throughout 18 U.S.C. and 31 U.S.C.).

(60) Ballard, supra note 50, at 45.

(61) Sinclair, supra note 51, at 8.

(62) Solicitor General praises banks’ efforts in struggle against money laundering, 97 CANADIAN BANKER, Sept-Oct 1990, at 33 (quoting Pierre Cadieux, Solicitor General, in a speech to the first Conference on Money Laundering held in Montreal).

(63) Gael Kerrigan, Swiss propose to criminalise money laundering, 8 THE COMPANY LAW., 285 (1987).

Although the Swiss Bankers’ Association and its members had reached a private agreement in 1977 (Agreement on the Observance of Care by the Banks in the Acceptance of Funds and on the Practice of Banking Secrecy (Vereinbarung uber die Sorgfaltspflicht bei der Entegennahme von Geldern unde die Handhabung des Bankgeheimnisses)), enforcement mechanisms were inadequate. This Agreement imposed an obligation on members of the Swiss Bankers’ Association to identify depositors and to refrain from entering transactions when the funds being entrusted were known or should have been known to originate from unacceptable or illegal sources.

Secondly, it has been held that under the Swiss Bank Act (Art. 3, Sect. II(c), Bank G), banks are to clarify suspicious transactions to the Swiss Banking Commission and sanctions may be imposed for failure to meet the requisite standard of care, but the applicability of this Act is restricted to banking institutions and its executive management. Moreover, the Banking Commission has had inadequate means to enforce the Bank Act.

The Swiss Narcotics Act of 1951 (Bundesgesetz vom 3. Oktober 1951 uber die Betaubungsmittel (SR 812.121) (BetmG), Art. 19 Part 1 Sect. VII.) Prohibits the financing of illegal drug activities, but until recently its application has been judicially restricted to cases in which the funds have been reinvested in the drug trade.

The Swiss criminal provision prohibiting the acceptance of property derived criminally (Art. 144 Sect. I, Schweizerisches Strafgesetzbuch vom 21. Dezember 1937 (SR 311.0) (StGB) (Hehleri)) does not apply to property derived from such activities as illegal drug trafficking in which there is no direct victim.

The provision of the Swiss Penal Code making it an offense to act as accessory after the fact (Art, 305 Sect. I, StGB (Begunstigung)) applies not to money laundering, which prevents the confiscation of proceeds, but to actions that obstruct criminal investigation or shelter a criminal from prosecution.

In addition, Swiss officials’ ability to cooperate with foreign authorities by confiscating the proceeds of illicit drug activities is hindered by the Swiss legal requirement for concrete proof linking the individual to the crime which, in effect, requires each sum of money to be seized to be proven to be linked with a specific drug transaction. Rebecca G. Peters, Money Laundering and Its Current Status In Switzerland: New Disincentives For Financial Tourism, 11 Nw. J. INT’L L. & BUS. 104, 105-106, 111, 122, 125-30 (1990).

Indeed, in 1985 some money launderers in Switzerland could be charged only with offenses relating to drugs. Kerrigan, supra.

(64) AS 1990 I 1077ff, 1078.

(65) Schweizerisches Strafgesetzbuch vom 21. Dezember 1937 (SR 311.0) (StGB) STGB art. 305bis.

(66) Id. art. 305ter.

(67) Krauskopf, supra note 34, at 290.

One commentator, however, asserts that the new money laundering provisions may facilitate greater cooperation by Swiss officials with foreign ones under Swiss law

(68) Council Directive 91/308, 1991 O.J. (L 166) 77.

(69) Id.

(70) Id. at Art. 2.

(71) Id. at Art. 16. Moreover, the Member States have declared unanimously that they will ensure legislation making money laundering a crime is in place by December 31, 1992. 1991 O.J. (L 166) 83.

(72) Council Directive 91/308, 1991 O.J. (L 166) 77. Art. 12.

(73) Id. at Art. 3.

(74) Id. at Art. 4.

(75) Id. at Art. 5.

(76) Id. at Art. 6.

(77) Id, at Art. 8.

(78) Id. at Art. 11.

(79) Id. at Art. 9.

(80) Id. at Art. 13.

(81) Id. at 77-78. The United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances was adopted in Vienna, on Dec. 19, 1988. UN Doc. E/CN.82/15 (1988).

(82) D. W. Sproule & Paul St-Denis, The UN Drug Trafficking Convention: An Ambitious Step, 27 THE CANADIAN Y.B. OF INT’L L. 263, 264 (1989).

(83) Single Convention on Narcotic Drugs, 1961, done at New York, Mar. 30, 1961, as amended by its 1972 Protocol.

(84) The Convention on Psychotropic Substances, 1971, done at New York, Feb. 21, 1971.

(85) United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, done at Vienna, Dec. 19, 1988 (hereinafter referred to as the Convention Against Illicit Traffic), UN Doc. E/CN.82/15 (1988).

(86) Id.

(87) Kerrigan, supra note 63, at 285.

(88) Convention Against Illicit Traffic, supra note 85, at Article 3.

(89) Id. at Art. 4.

(90) Id. at Art. 5, 6.

(91) Id, at Art. 7-10

(92) Id. at Art. 11

(93) Id. at Art. 12, 13.

(94) Id. at Art. 14.

(95) Id. at Art. 15, 16, 18.

(96) Id. at Art. 17.

(97) Id. at Art. 19.

(98) In the absence of this phrase, a state could assert that a particular offense is a fiscal rather than a criminal one in order to justify refusal to cooperate with other states’ initiatives to investigate, prosecute, or extradite. Sproule & St-Denis, supra note 82, at 268-75.

(99) Id. at 281-86.

(100) This has been made possible by the inclusion in the Convention of safeguard clauses and the applicability of the generous rules concerning reservations under the Vienna Convention on the Law of Treaties (done at Vienna, May 23, 1969).

(101) Sproule & St-Denis, supra note 82, at 287, 292.

(102) FATF, supra note 4, at 1.

(103) Id.

(104) Id. at 22.

(105) 15 U.S.C [unkeyable] 1693-1693(r) (1988).

(106) Edward Rubin, Efficiency, Equity and the Proposed Revision of Articles 3 and 4, 42 ALA. L. REV. 551, 586 (1991).

(107) The Concept, supra note 14, at 3.

(108) From Commodity, supra note 8, at 144.

(109) Id. at 154.

(110) The Concept, supra note 14, at 4.

(111) Id. at 2.

(112) Id. at 3.

(113) This three-party model can be expanded to encompass four or more parties. Id. at 10-12.

(114) Id. at 5-6.

(115) An example of this is a wire transfer. The Evolving, supra, note 17 at 187.

(116) The Concept, supra, note 14 at 7. Geva defines paper currency as [p]aper embodying A’s instructions [circulating] so as to put its holder from time to time in B’s shoes.” Id. at 6.

(117) From Commodity, supra note 8, at 146.

(118) Robert C. Effros, A Banker’s Primer on the Law of Electronic Funds Transfers, 105 BANKING L.J.. 510 (1988).

(119) From Commodity, supra note 8, at 146.

(120) They have been described as “[p]lastic cards bearing information as to cardholder, card number, and card issuer, issued to customers” by depositary and non-depositary financial institutions. Benjamin Geva, The E.F.T. Debit Card 15 CANADIAN BUS, L.J. 407 (1989) [HEREINAFTER E.F.T.].

(121) A check guaranty card is a payment card that assures payment of a check. However, unlike a debit card transaction, the use of a check guaranty card does not result in an automatic debit to the consumer’s account. Although a check authorization service permits the merchant to ensure that the consumer does not have a history of writing checks backed by insufficient funds, the debit to the consumer’s account occurs only when the check is cleared through his account, rather than upon use of the check guaranty card. Tomme jeanne Fent, Commercial Law: Electronic Funds Transfers: How New U.C.C. Article 4A May Affect Consumers, 43 OKLA. L. REV. 339, 342 (1990). Therefore, check guaranty cards are exempted from coverage by the Electronic Fund Transfer Act

(122) These cards also require either comparison to a current list of misued cards or authorization by the issuer. E.F.T., supra note 120, at 408-09.

(123) The terminal at the point of sale reads the information stored in the magnetic stripe, which initiates on-line electronic authorization. Id. at 409. For example, although a debit card facilitates access to money in the cardholder’s deposit account, an EFT debit card requires only electronically communicated information to effect the transfer of funds from that account.

(124) Thus, the personal identification number used by the cardholder is verified at the point-of-sale terminal using the information stored in the microchip. Communication with a host computer is not required. Id. at 415-16.

(125) Whether this is a cash alternative or a means of raising credit depends on whether the monthly balance is paid off entirely, or paid back by monthly installments.

(126) The card-issuer is the merchant.

(127) The cardholder agreement is between the cardholder and the card-issuing bank. Second, there is a contract between the merchant and the cardholder for the purchase of goods or services. Third, the merchant’s bank and the merchant enter a merchant member agreement, and fourth, the merchant’s bank may enter a contract with the card-issuing bank as participants in the clearance system. JACOB B. ZIEGEL ET AL., COMMERCIAL AND CONSUMER TRANSATIONS: CASES, TEXT AND MATERIALS 891 (2d ed. 1990).

(128) Thomas O. Mittelsteadt, The Stop Payment Right in an Electronic Payment Environment: An Analysis of the Transition Problems Involved when Integrating a Traditional Right into New Value Transfer Systems 17 NEW ENG. L. REV. 359, 403-04 (1982).

(129) E.F.T., supra note 120, at 411-12.

(130) Generally this differs from the use of a credit card that creates an obligation to pay by drawing on a line of credit. Nonetheless, a debit cardholder’s account may range “from a traditional [checking] account to a credit card line of credit.” Mittelsteadt, supra note 128, at 413 n.350.

(131) If the actual debit is made some time after the purchase, then the cardholder maintains a float similar to that which characterizes a check transaction. For instance, “[i]n the Mastercard II and Visa system, the account is not charged until the merchant deposits the form and the form is processed to the purchaser’s bank.” However, if the debit system at the point of sale is on-line, the charge to the cardholder’s account may be immediate, thereby eliminating the float. Id.

(132) E.F.T., supra note 120, at 406.

(133) “In principle, the credit card can be used to access directly funds in the cardholder’s account. [However], since such a use creates a debit in the cardholder’s account, the card so used is in fact a ‘debit card.”’ ZIEGEL, supra note 127, at 903.

(134) E.F.T., supra note 120, at 411-12.

(135) In some United States jurisdictions, the Personal Identification Number is used to provide a non-bank with direct access to the cardholder’s account. E.F.T., supra note 120, at 417-18.

(136) Id. at 413-17.

(137) Rubin, supra note 106, at 560-62.

(138) Id.

(139) Id. at 592.

(140) Although consumer associations assert that “contracts governing the use of debit cards are one way [and] serve the interests of financial institutions,” Larry Ouellette, On the safe side

Even though “deposit-taking institutions maintain that holders of [payment] cards undertake in a contract to assume complete liability for transactions effected with their cards and [Personal Identification Numbers],” these institutions are comforted by the fact that the terms to which the customers are subject are set out in the governing contract and that the customers are required to “read carefully before signing.” Ouellette, supra at 38-39.

(141) E.F.T., supra note 120, at 432.

(142) The United States’ counterpart is Article 3 of the Uniform Commercial Code which succeeds the 1896 Negotiable Instruments Law.

(143) Personal property can be either tangible or intangible. Intangible personal property are choses in action, and they can be either pure intangibles or documentary intangibles. A chose in action is the right to proceed in court to recover personal property or to acquire payment of an amount of money and is to be distinguished from a chose in possession. For example, “[t]axes and customs, if paid, are a chose in possession

An instrument is a document of title representing the right to money. Indeed, it is a “writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is in ordinary course of business transferred by delivery with any necessary indorsement or assignment.” U.C.C. [unkeyable] 9-105(1) (1990). Therefore, instead of the underlying thing being goods, the underlying thing is the right to the payment of money and is transferrable such that transferring the instrument to a holder constitutes transferring the right to payment of the debt. Documents of title may be either negotiable or non-negotiable, and instruments may be either negotiable (a negotiable instrument is defined in U.C.C. [unkeyable] 3-104 (1990)) or non-negotiable.

There are two components of the concept of negotiability: transfer by delivery and the exception to the principle of nemo dat quod non habet that a transferee can obtain no better title than that possessed by the transferor. Thus, even if there is a defective title, if the negotiable instrument is negotiated to a party who is a holder in due course, then the transferee can obtain better title than the transferor possessed.

The “bill of exchange” is largely obsolete, but when the Bills of Exchange Act was drafted in 1888, the bill of exchange was the basis of transactions. However, now emphasis has shifted away from this type of negotiable instrument to such payment instruments as checks, and there has been a movement away from paper instruments to electronic payment systems and letters of credit.

(144) Section 16 of the Bills of Exchange Act states:

(1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer.

(2) An instrument that does not comply with the requirements of subsection (1), or that orders any act to be done in addition to the payment of money, is not, except as hereinafter provided, a bill.

Checks are defined in section 165(1) to be a special type of bill of exchange, and the Bills of Exchange Act also applies to promissory notes which are defined in section 176(1). On the other hand, the common law still applies to the instruments covered by the Bills of Exchange Act, except to the extent that it is inconsistent with that Act. Section 9 states that “[t]he rules of the common law of England, including the law merchant, save in so far as they are inconsistent with the express provisions of this Act, apply to bills, notes and [checks].”

(145) There are two points of view with respect to the contracts governing such payment cards as debit cards. “[D]eposit-taking institutions maintain that holders of [payment] cards undertake in a contract to assume complete liability for transactions effected with their cards and their [Personal Identification Numbers], whereas consumer associations hold that these contracts demand more of consumers than should be reasonably expected.” Ouellette, supra note 140, at 38.

(146) Mittelsteadt, supra note 128, at 360.

(147) Whereas there are thousands of banks in the United States, there are only “[e]ight domestic banks and 57 affiliates of foreign-owned banks” in Canada. Solicitor General, supra note 62, at 33. Therefore, the fact that Canada has so few banks may render them more politically powerful than their United States counterparts.

Nonetheless, even in the United States financial institutions insisted that provisions protecting the freedom to contract be inserted into the Uniform Commercial Code

(148) 15 U.S.C. [unkeyable] 1693-1693r (1988).

(149) Fent, supra note 121, at 339. Indeed, the introduction of the Electronic Fund Transfer Act at the federal level before state law in this area developed has facilitated relative uniformity. This can be contrasted to the laws governing consumer protection with respect to drafts and notes which laws vary from one state to another. Substantial provisions addressing consumer rights with respect to drafts and notes had been introduced by a number of states prior to development of the Uniform Consumer Credit Code. Many of these laws had been passed only after substantial debate and compromise

(150) 15 U.S.C. [unkeyable] 1693-1693r (1988).

(151) Regulation E, 12 C.F.R. [unkeyable] 205.1 (1991).

(152) 15 U.S.C. [unkeyable] 1693m(a) (1988).

(153) 15 U.S.C. [unkeyable] 1693g (1988).

(154) Ouellette, supra note 140, at 39.

(156) See infra note 290 and accompanying text.

(157) Cash facilitates money laundering to the extent that records of the parties to cash transactions involving funds obtained illegally are not kept by or accessible to law enforcement authorities.

(158) The precious metal was durable, protable, homogeneous, and divisible in addition to being easily stored and hidden. From Commodity, supra note 8, at 121, 124, 127-29.

(159) A primitive punchmark borne by each primitive coin, which coins conceivably began as “discs and roundels,” expressly guaranteed fineness or weight or both. PAUL EINZIG, PRIMITIVE MONEY IN ITS ETHNOLOGICAL, HISTORICAL AND ECONOMIC ASPECTS (2nd ed. 1966) 192, 218. This punchmark evolved to express the purchasing power of each coin, usually in terms of the coin’s metallic content, and impeded dishonest efforts to cut off coins’ edges because it covered most of the coin’s surface. From Commodity, supra note 8, at 130-32.

(160) Coining was begun in Greece and later adopted in Rome. For a discussion of the use and transferability of coins see From Commodity, supra note 8, at 129-35.

(161) See supra note 124 and accompanying text.

(162) From Commodity, supra note 8, at 136-38.

(163) Id. at 156.

(164) Although inscriptions on coins came to express political power and then to confer exchange value upon the coin, the value of the metallic content of a coin is unstable. Thus, the purchasing power of a coin frequently varied from the actual value of the metallic content of the coin. Indeed, the princes and dukes of medieval Europe repeatedly undertook to create a divergence between nominal and real values of coins by practising debasement and recoinage in order to raise revenues. Since the prince had a right to keep a percentage of all bullion brought to the mints for recoining, he would entice merchants to deliver bullion for recoining by ensuring that the amount in face value received by each merchant exceeded the amount that the merchant had brought in. Therefore, in the short run the merchant would reap a profit

(165) The receipt for a deposit made in this way “came to be known as a goldsmith’s or banker’s note and evolved into an early form of the promissory note.” From Commodity, supra note 8, at 144-45.

(166) In the case of a goldsmith’s note, the goldsmith would issue a receipt indicating that he undertook to pay on demand when the instrument was presented. This receipt “came to be known as a goldsmith’s or banker’s note and evolved into an early form of the promissory note.” In the case of a goldsmith’s draft, the depositor could draw upon the goldsmith amounts not exceeding the amount of the deposit. “Such drafts, payable on demand and made out to a payee or bearer, were the first cheques.” Id. at 144-46.

(167) However, because payment depended on the reliability of the promisor’s undertaking to pay, the credit of the issuer rather than the form of the instrument determined the acceptability of the paper money. Checks became used primarily by the landowning and noble classes, who had broadly accepted and well known signatures. On the other hand, bankers’ notes became more widely used as a medium of exchange

Originally, the goldsmith’s note was a receipt for the full amount deposited and any amounts returned to the depositor were indicated on the note itself. Therefore, it was not possible to disburse the deposit to many creditors or to pay with only part of it. A more sophisticated system developed whereby receipts were issued for various portions with an aggregate sum equal to the entire amount of the deposit. Ultimately goldsmiths also issued notes for loans rather than solely for deposits. Id. at 146-47.

(168) Nonetheless, there is a risk that the cards themselves will be lost or stolen and then misused. Indeed, “a half-million bank cards were reported lost or stolen by their owners during fiscal 1991” and “[l]osses to credit card crime cost Canadian issuers of Visa and MasterCard $50 million during the fiscal year. This represents an increase of more than 50 per cent over fraud losses sustained for the same period in 1990.” Michael Ballard, On the safe side

(169) From Commodity, supra note 8, at 155.

(170) It was not until the Bank of England was established in 1694 and its issue of notes payable to bearer began, that the banker’s note was recognized as a form of money that could completely replace coins. The risk attached to Bank of England notes was less than that associated with goldsmiths’ notes in that the Bank of England was less likely to become insolvent than were goldsmiths. Thus, “the Bank of England’s notes competed successfully with goldsmiths’ notes and finally superseded them as paper money.” Id. at 148-49, 150.

Indeed, in 1758 Lord Mansfield recognized Bank of England notes as a universal medium of exchange:

Now they are not goods, not securities, nor documents for debts, nor are so esteemed: but are treated as money, as cash, in the ordinary course and transaction of business, by the general consent of mankind

Ultimately, section 6 of the Bank of England Act, 1833, made the Bank of England’s notes legal tender. 2 & 3 Eliz. 2, c. 12. These remain legal tender pursuant to the Currency and Bank Notes Act, 1954. See MANN, supra note 7, at 16. The Bank of England Act, 1833, provided for convertibility in that the holder of a banknote had the right to demand coin. However, the Gold Standard Act, 1925, 15 & 16 Geo. 5, c. 29 overturned this principle and introduced “limited convertibility.” It “exempted the Bank of England from liability to redeem its notes with gold coin and merely placed it under the obligation to sell gold bullion at a fixed price, and, moreover, granted to the Bank of England the exclusive right of obtaining coined gold from the Mint.” MANN, supra note 7, at 39.

The Gold Standard (Amendment) Act, 1931, 21 & 22 Geo. 5, c. 46, abolished this “limited convertibility.” Therefore, even though Bank of England notes are payable at the Bank, (Currency and Bank Notes Act 1954 (U.K.), 2 & 3 Eliz. 2, c. 12, s. 1(3).) “such payment can be made in the Bank’s own notes. Undoubtedly, bank notes have superseded coins as the principal form of money.” From Commodity, supra note 8, at 154.

Thus, paper money evolved from “an ordinary chattel to a specie of valuable chattel and, finally, into a paper (valueless chattel) containing an abstract promise to pay money.” Id. at 155.

(171) Alexiou & McInnes, supra note 140, at 9-13.

(172) Banque Belge v. Hambrouck, 1 K.B. 321 at 329 (1921).

(173) The terms “holder” and “payee” will at times be used interchangeably throughout this article, depending upon the payment mechanism being discussed. For instance, the holder of a check may not be the payee if the check has been endorsed.

(174) The payee also is generally subject to the risk that the intermediary institution, such as the drawee in the case of a check or the card-issuer in the case of payment cards, may become insolvent. However, the focus of the following discussion is predominately upon the risks of a stop payment order and of insufficient funds.

(175) See supra notes 102-04 and accompanying text.

(176) Oliver Wulff, Two Ways to Achieve the Same Goal: The Model Law on International Credit Transfers and the New UCC Article 4A in the National and International Contexts, 9 WIS. INT’L L.J. 69 (1990).

(177) Bills of Exchange Act, s. 165(1). In the United States, a check is “a draft payable on demand and drawn on a bank.” U.C.C. [unkeyable] 3-104(f) (1990). A draft is a negotiable instrument made to order, as opposed to a “note” which is a negotiable instrument made as a promise. U.C.C. [unkeyable] 3-104(a), (b), (e) (1990).

(178) 12 U.S.C. [unkeyable] 4001-4010 (1988), implemented by Regulation CC, 12 C.F.R. [unkeyable] 229 (1990).

(179) Most of these concern the crossing of a check. Crossing is a concept originating in England and not much used in Canada.

(180) Bank clearings are items including checks that are presented for collection through a clearing house, an association of banks voluntarily formed to permit its members to exchange notes, drafts, and checks daily. Settlement is the “striking of balances among members” of a clearing house association. GLENN G. MUNN ET AL., ENCYCLOPEDIA OF BANKING & FINANCE (9th ed.) 75, 184, 839 (1991).

(181) Barclays Bank v. Bank of England, 1 All Eng. Rep. 385 (1985) (responsibility of presenting bank until check delivered to paying bank)

(182) Section 3-103(a)(7) defines “ordinary care” as the observance of reasonable commercial standards, prevailing in the area in which that person is located, with respect to the business in which that person is engaged” and is incorporated into Article 4 by [unkeyable] 4-104(c) (1990).

(183) For example, s. 172(2) states that “the bank paying the cheque in good faith and without negligence shall not be responsible or incur any liability.”

(184) Obviously, estoppel by signature under section 132 of the Bills of Exchange Act, R.S., c. B-5, does not apply where the drawer’s signature has been forged.

(185) Section 48(1) of the Bills of Exchange Act, R.S., c. B-5, specifies that “[s]ubject to this Act, where a signature on a bill is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.” See Arrow Transfer Co. Ltd. v. Royal Bank of Canada, 27 D.L.R.3d 81 (S.C.C. 1972) (estopped by conduct, for example failing to notify the bank of a forgery of which he is aware).

(186) Section 167(1)(a) of the Bills of Exchange Act states that “[t]he duty and authority of a bank to pay a cheque drawn on it by its customer are determined by (a) countermand of payment….”

Generally, if the drawee bank pays over an effective countermand, the drawee bank must re-credit the drawer’s account. Indeed, the drawer needs only communicate the countermand order with reasonable accuracy in order for the bank to be liable for failure to follow the customer’s instructions to countermand the check. Remfor Industries Ltd. v. Bank of Montreal, 21 O.R.2d 225, 5 B.L.R. 22 (Ont. C.A. 1979). The court in this case held that the leading case, Westminster Bank Ltd. v. Hilton, 43 Terr. L.R. 124 124 (1927), did not require all details of the check to be communicated accurately. The court also recognized that U.S. cases have imposed on the banks’ customers the obligation only to describe the check with reasonable accuracy. 21 O.R.2d at 228.

However, s. 165(3) diminishes the usefulness of the customer’s ability to countermand the check. Because this section makes the depositary bank a holder in due course, the drawer can be sued if the depositary bank cannot charge back the amount of the check.

(187) Section 20(5) of the Bills of Exchange Act deems such an instrument to be a bearer instrument: “Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer.” This is significant because in the case of a bearer instrument, there is no forgery of the payee’s name, which is why the drawer is liable. Fok Cheong Shing Investments Co. Ltd. v. Bank of Nova Scotia, 123 D.L.R.3d 416 (Ont. C.A. 1981), aff’d, 146 D.L.R.3d 617 (S.C.C. 1987), has upheld a distinction that determines that the drawer is liable if the payee’s name is completely fabricated if the payee’s name is that of a real person known to be dead, or if the payee’s name is that of a real person known to the drawer but written on the instrument by way of pretense.

(188) If the signature of the drawer or endorser has been forged, assuming that the forger is insolvent or has absconded, generally the loss is borne by the first party to deal with the instrument after the forgery has occurred. The Bills of Exchange Act s. 130 states that “[n]o person is liable as drawer, endorser or acceptor of a bill who has not signed it as such, but when a person signs a bill otherwise than as a drawer or acceptor, he thereby incurs the liabilities of an endorser to a holder in due course and is subject to all the provisions of this Act respecting endorsers.”

(189) Generally, this risk is remote because the drawee of a check is a bank

(190) Leona Beane, Rights of Drawers, Banks, and Holders in Bank Checks and Other Cash Equivalents, 19 TULSA L.J. 612, 613 (1984).

(191) The rights of holders are set out in s. 73 of the Bills of Exchange Act.

(192) Section 2 of the Bills of Exchange Act.

(193) Section 59(1) of the Bills of Exchange Act states that “[a] bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill.”

(194) Section 138(1) of the Bills of Exchange Act states that “[a] bill is discharged by payment in due course by or on behalf of the drawee or acceptor.”

(195) Pursuant to s. 53(1) of the Bills of Exchange Act R.S., c. B-5.

(196) Bills of Exchange Act, ss. 2, 52(1), 57(1).

(197) See Uniform Consumer Credit Code [unkeyable] 3.307, 3.403-3.405 (1974)

(198) Under [unkeyable] 55 of the Bills of Exchange Act in Canada, the holder of the check must have a check which has been negotiated, the check must not be overdue, it must be complete and regular on its face, the holder must not have had notice of previous dishonor or defect in title, the holder must have taken the check for value in good faith. Bills of Exchange Act, s. 2, 3, 55

Under s. 165(3) of the Bills of Exchange Act, a bank may qualify as a holder in due course even if it does not meet all of the requirements outlined in s. 55 of the Bills of Exchange Act. See Toronto Dominion Bank v. Jordan & Jordan, 52 B.C.L.R. 63 (S.C. 1984) (bank’s requirement of good faith).

It has been held in Canada that the holder cannot be a payee. R.E. Jones Ltd. v. Waring and Gillow Ltd., A.C. 670 (H.L. 1926) followed in Royal Bank of Canada v. Pentagon Constr. Maritime Ltd., 143 D.L.R.3d 764 (N.B.Q.B. 1983).

Although in the United States, the U.C.C. previously specifically provided that the payee could be a holder in due course (U.C.C. [unkeyable] 3-302(2) (1989)), that section “has been omitted in revised Article 3 because it is surplusage and may be misleading. The payee of an instrument can be a holder in due course, but use of the holder-in-due-course doctrine by the payee of an instrument is not the normal situation.” U.C.C. [unkeyable] 3-302 Comment 4 (1990).

(199) Beane, supra note 190, at 614.

(200) ZIEGEL, supra note 127, at 781. In the United States, a certified check is “a check accepted by the bank on which it is drawn. The drawee of a check has no obligation to certify the check, and refusal to certify is not dishonor of the check.” U.C.C. [unkeyable] 3-409 (1990).

(201) Mittelsteadt, supra note 128, at 392-93. Thus, apart from the risk of the bank’s making a mistake, there is practically no risk that the certified check will be dishonored by the bank because there are insufficient funds in the drawer’s account.

(202) Re Maubach and Bank of Nova Scotia, 60 O.R.2d 220 (C.A. 1987), aff’g, 40 D.L.R.4th 134 (Ont. H.C.J. 1987).

(203) U.C.C. [unkeyable] 3-302(a), 3-418(c), 4-303 & 4-403 (1990). However, if the bank accedes to the customer’s request to stop payment, normally the bank will request indemnity. Beane, supra note 190, at 616-17.

(204) U.C.C. [unkeyable] 4-403 Comment 4 (1990).

(205) See Re Maubach and Bank of Nova Scotia, 60 O.R.2d 220 (C.A. 1987), aff’g, 40 D.L.R.4th 134 (Ont. H.C.J. 1987), where it was held that upon losing a certified check before delivery to the payee, the drawer was required to comply with the drawee’s request for a bond of indemnity before the bank would issue a duplicate check.

(206) In the United States, the bank is both the drawer and the drawee of a cashier’s check. “‘Cashier’s check’ means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank.” U.C.C. [unkeyable] 3-104(g) (1990). Such a check may be used either to pay the bank’s obligations or to transfer value. A party requesting the issuance of the cashier’s check is the remitter, and generally, the bank receives payment from the remitter before making the instrument. Therefore, the bank’s liability is illusory and the risk of non-payment in fact lies with the remitter, although technically the remitter is not liable on the instrument itself. Mittelsteadt, supra note 128, at 397-98. Indeed, pursuant to U.C.C. [unkeyable] 3-413 & 3-414 (1978 version), the remitter is not an endorser, acceptor or maker, and “‘[r]emitter’ means a person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser.” U.C.C. [unkeyable] 3-103(a)(11) and 3-412 Comment 1 (1990).

Money orders in the U.S. are issued by financial institutions subject predominately to the Uniform Commercial Code, and by post offices subject primarily to Post Office regulations. Once the transaction is completed, the instrument passes through the normal clearing channels and is paid with the funds deposited by the purchaser of the money order. Mittelsteadt, supra note 128, at 399-400. “An instrument may be a check even though it is described on its face by another term, such as ‘money order.'” U.C.C. [unkeyable] 3-104(f) (1990).

(207) Nat’l Newark & Essex Bank v. Giordiano, 268 A.2d 327, 329 (N.J. 1970). See Beane, supra note 190, at 620.

(208) Beane, supra note 190, at 622-23. Indeed, it has been held that where a bank realizes after it issues a cashier’s check that there are insufficient funds in the purchaser’s account to cover the amount of the check, the bank is not entitled to stop payment on that instrument. Kaufman v. Chase Manhattan Bank, 370 F. Supp. 276 (S.D.N.Y. 1973).

(209) Mittelsteadt, supra note 128, at 399-400.

(210) U.C.C. [unkeyable] 3-418 & 4-403 Comment 4 (1990).

(211) Beane, supra note 190, at 622.

(212) In the United States, a teller’s check is also known as a “bank draft.” It is a “draft drawn by a bank (i) on another bank or (ii) payable at or through a bank.” U.C.C. [unkeyable] 3-104(h) (1990).

Usually the drawer is a savings and loan association or a savings bank. The issuing bank enters the name of the payee and the amount of the check, and signs the check as drawer. The purchaser of the teller’s check either pays for the check when it is issued or the issuing bank charges the amount of the check against the purchase’s savings account. In the United States, the purchaser is not the drawer, but the remitter. Beane, supra note 190, at 645.

(213) Indeed, both teller’s checks and cashier’s checks are checks as defined by U.C.C. [unkeyable] 3-104(f) (1990). “The present uses of teller’s [checks] parallel those of cashier’s [checks]. Since savings banks and savings and loan associations cannot provide [checking] services, they must use teller’s [checks] drawn upon commercial banks in situations where commercial banks would simply use their own cashier’s [checks].” Beane, supra note 190, at 645, 647.

However, a second function of teller’s checks is to serve as substitutes for cash at a retail level. For instance, in Malphrus v. Home Savings Bank, 254 N.Y.S.2d 980 (Albany Co. Ct. 1965), the purchaser of a car obtained a teller’s check payable to the vendor. Similarly, a purchaser of illegal substances could obtain a teller’s check for payment purposes.

(214) Malphrus v. Home Savings Bank, 254 N.Y.S.2d 980 (Albany Co. Ct. 1965)

(215) Malphrus v. Home Sav. Bank, 254 N.Y.S.2d 980, 982 (Albany Co. Ct. 1965). See Beane, supra note 190, at 646 n.218.

(216) Moon Over the Mountain, Ltd. v. Marine Midland Bank, 386 N.Y.S.2d 974, 977 (N.Y. Civ. Ct. 1976).

(217) Savemart, Inc. v. Bowery Sav. Bank, 445 N.Y.S.2d 963 (N.Y. Civ. Ct. 1982), aff’d, 461 N.Y.S.2d 144 (App. Term 1982).

Indeed, in Canada, the exposure of holders of teller’s checks or money orders to the risk of bank failure is greater than that of holders of certified checks. If a depositary financial institution such as a bank becomes insolvent, bank drafts and money orders follow certified checks in priority subject to secured parties’ rights. ZIEGEL, supra note 127, at 781.

(218) However, the court in Savemart, Inc. v. Bowery Sav. Bank, 445 N.Y.S.2d 963 (N.Y. Civ. Ct. 1982), aff’d., 461 N.Y.S.2d 144 (App. Term 1982), held that a holder of a teller’s check does not obtain an action against the drawer if the check has been forged. The position of a holder of a teller’s check was summarized thus: “although a teller’s [check] is obviously much safer to accept than a personal [check], they are not 100% safe as the payee is subject to the defense of forgery.” 455 N.Y.S.2d at 963.

(219) In the United States, a traveler’s check is a negotiable instrument that “(i) is payable on demand, (ii) is drawn on or payable at or through a bank, (iii) is designated by the term ‘traveler’s check’ or by a substantially similar term, and (iv) requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument.” U.C.C. [unkeyable] 3-104(i) (1990).

The format of these checks is relatively standard, consisting of a promise by the issuer to pay a certain amount of money. The person purchasing the traveler’s checks signs them at the time of purchase, and in order to facilitate verification of claims for lost or stolen checks, the holder countersigns the checks when he negotiates them, and a serial number identifies each check. If the original and counter signatures match, the instrument is valid.

(220) United States courts have not clearly defined the legal characteristics of traveler’s checks

In Canada there is some controversy over whether a traveler’s check is a negotiable instrument and falls under the Bills of Exchange Act. E.P. Ellinger, Travellers’ Cheques and the Law, 19 U. TORONTO L.J. 132 (1969).

(221) Fisher v. Citicorp Serv. Inc., 433 N.Y.S.2d 966 (N.Y. Civ. Ct. 1980). See Beane, supra note 190, at 664 n.337.

(222) Mittelsteadt, supra note 128, at 383.

(223) Beane, supra note 190, at 661-62.

(224) First Nat’l City Bank v. American Broadcasting Co., 328 N.Y.S.2d 326 (Sup. Ct. 1971). See Beane, supra note 190, at 662-63.

(225) Rosenfeld v. First Nat’l City Bank, 319 N.Y.S.2d 35 (N.Y. Civ. Ct. 1971). See Beane, supra note 190, at 663 n.330.

(226) First Nat’l City Bank v. American Broadcasting Co., 328 N.Y.S.2d 326 (Sup. Ct. 1971). See Beane, supra note 190, at 662-63.

(227) Rubin v. American Express Co., 315 N.Y.S.2d 89 (N.Y. Civ. Ct. 1970), modified, 324 N.Y.S.2d 482 (App. Term 1971). See Beane, supra note 190, at 663.

(228) American Express Co. v. Rona Travel Serv., Inc., 187 A.2d 206 (N.J. Super. 1962). See Beane, supra note 190, at 664 n.335.

(229) Beane, supra note 190, at 665.

(230) The term “simple” check is used here to describe a check that is not certified and to distinguish it from a teller’s check, cashier’s check, or traveler’s check.

(231) Indeed, issuers of traveler’s checks try to encourage use by people other than travelers who wish to purchase any good. Mittelsteadt, supra note 128, at 381 n.141, 383.

(232) U.C.C. [unkeyable] 3-103(a)(11), 4-104(a)(5) (1990).

(233) Mittelsteadt, supra note 128, at 399.

(234) However, if the purchaser has an account with the institution, tracing would be possible. Id. at 399-400.

(235) Welling, supra note 1, at 291, note 19. For further discussion of this issue see Restriction on Purchase Money Orders, 52 Fed. Reg. 27,992 (1987).

(236) Welling, supra note 1, at 291 n.19.

(237) Reference to “bank” checks includes certified checks, cashier’s checks, teller’s checks, and bank money orders. Beane, supra note 190, at 614.

(238) The phrase “wire transfer” stems from the fact that communication between banks in an international transaction usually is transmitted by telex, cable, orwire (The Evolving, supra note 17, at 187) and is to be distinguished from the term “electronic fund transfer” (Eft), which is more closely associated with consumer transactions. Fent, supra note 121, at 339-40.

(239) Wire transfers also can be paper-based, for example the instructions maybe communicated to a bank through the ordinary mail. The Evolving, supra note 17, at 188.

(240) Wire transfers account for 78.5% of the value of total payments made in the United States. David B. Humphrey, Payment System Risk, Market Failure, and Public Policy, in ELECTRONIC FUNDS TRANSFERS AND PAYMENTS: THE PUBLIC POLICY ISSUES 83, 89 (Elinor Harris Solomon ed. 1987).

(241) Mittelsteadt, supra note 128, at 381 n.141, 426-27.

(242) It also is possible to communicate information of other types. The Evolving, supra note 17, at 188, 190.

Although there are a number of wire systems, in the United States the most popular are Clearing House Interbank Payments System (CHIPS), which links a number of prominent New York banks, and Bankwire II, which is based at the Federal Reserve. Mittelsteadt, supra note 128, at 426-27. Usually, this type of communications network links financial institutions. Indeed, even though wire transfers a few years ago accounted for 78.5% of the value of payments made in the United States, only .04% of the number of total payments were made by wire transfer. Humphrey, supra note 240, at 83, 89.

(243) In the United States, existing case law with respect to wire transfers is inadequate. Tony M. Davis, Comparing Article 4A with Existing Case Law on Funds Transfers: A Series of Case Studies, 42 ALA. L. REV. 823 (1991). However, U.C.C. Article 4A addresses security procedures, authorization of payment orders, and erroneous payment orders. U.C.C. [unkeyable] 4A-201 to 4A-205 (1989).

(244) 15 U.S.C. [unkeyable] 1693a(6) (1988).

(245) However, Article 4A is not intended to protect consumer interests and, indeed, expressly excludes application to transactions governed by the Electronic Fund Transfer Act. U.C.C. [unkeyable] 4A-108 (1989).

(246) The mechanics of wire transfer systems are controlled primarily by Federal Reserve Regulation J (12 C.F.R. [unkeyable] 210.50-210.65 (1992)), the operating rules of the particular wire network, and the private law of contracts. Mittelsteadt, supra note 128, at 426-27.

(247) Bradford Trust Co. v. Texas American Bank, 790 F.2d 407 (5th Cir. 1986)

It has been suggested that the law of negotiable instruments is not applicable to wire transfer payments because the requirements of the Bills of Exchange Act and of the Uniform Commercial Code are not met, and moreover no written document is required for a wire transfer payment. The Evolving, supra note 17, at 190.

(248) The Evolving, supra note 17, at 188, 190.

(249) Id. at 192-93.

(250) Id. at 191-92.

(251) At least one U.S. case has held that the correspondent bank was liable to the sending customer for negligence and breach of contract. Evra Corp. v. Swiss Bank Corp., 522 F. Supp. 820 (N.D. Ill. 1981), rev’d, 673 F.2d 951 (7th Cir. 1982), cert. denied, 459 U.S. 1017 (1983). See The Evolving, supra, note 17 at 191.

(252) The Evolving, supra note 17, at 192-93.

(253) The determination of what is a negotiable instrument is achieved by looking to practice, and if usage is reasonably certain, uniform and established, common law courts may recognize something as a negotiable instrument, despite precedent. Thus, it is possible that common law courts may be willing to recognize the instructions to a bank for a wire transfer payment as negotiable instruments such that the holders will acquire the protection accorded holders in due course and other holders of negotiable instruments.

(254) Peter Meltzer, Keeping Drug Money from Reaching the Wash Cycle: A Guide to the Bank Secrecy Act, 108 THE BANKING L.J. 230, 246 (1991).

(255) Wulff, supra note 176, at 84.

(256) Meltzer, supra note 255, at 248.

(257) Id. at 246.

(258) The inability of the credit card to discharge a debt where the merchant has not accepted the credit card as a means of payment is a significant variation from the ideal alternative to cash where payment is capable of discharging debts universally within the jurisdiction in which it has been accepted as legal tender. Whereas the ability of cash to discharge debts is limited by legal decision-makers, the capability of credit cards to discharge debts is delineated largely by business decision-makers.

(259) E.F.T., supra note 120, at 407-08. Nonetheless, the merchant is subject to the risk of the card-issuer’s insolvency. It was held in Re Charge Card Services Ltd., 3 All Eng. Rep. 289 (Ch. 1986) that payment by credit card is absolute and that, therefore, if the card issuer becomes insolvent, the merchant cannot sue the customer for the purchase price.

(260) In the case of payment by check, there usually is a short period of time within which the payor has to decide whether or not to stop payment. In the case of payment by credit card, however, the payor generally may choose to extend the period of payment. Thus, the cardholder’s right, which is analogous to the check-writers ability to stop payment, in effect is the ability of the cardholder to assert defenses against the card-issuer and to refuse to pay for the amount charged to the card.

(261) Unless there is variation of the rights under the cardholder’s agreement, this generally is the case because the merchant is involved as a creditor.

(262) The dominant view is that the relationship between the customer and the card-issuer is that of a loan and not of an assignment of a chose in action. For instance, in Harris Trust and Savings Bank v. McGray, 316 N.E.2d 209 (Ill. App. Ct. 1974), it was held that the nature of the relationship between the customer and the bank is that of a loan and not of an assignment of a chose in action. Therefore, unless there is found to be a joint venture between the card-issuer and the vendor, generally the cardholder will not be able to assert against the card-issuer product defenses that may be available against the merchant. In addition, the cardholder’s agreement often provides that the cardholder must settle directly with the merchant any disputes arising out of the quality or delivery of the goods or services in question. Nonetheless, where the card-issuer has a right of chargeback under the merchant member agreement, generally the practice of the card-issuer is to charge back the amount of the product to the cardholder’s account, thereby forcing the merchant to undertake the task of pursuing the cardholder in any product dispute.

(263) U.C.C. [unkeyable] 4-104(a)(9) (1990).

(264) Under U.C.C. [unkeyable] 3-103(a)(6) & (9) (1990), writings that only request or authorize payment or merely acknowledge obligations are not covered by Article 3.

In Canada, “the voucher or charge slip signed by the cardholder in connection with each sales transaction is normally not in the form of a promissory note and hence is not governed by Part V” of the Bills of Exchange Act. Ziegel, supra note 127, at 901.

(265) 15 U.S.C. [unkeyable] 1601-1667e (1988).

(266) Ziegel, supra note 127, at 901.

(267) E.F.T., supra note 120, at 432. It is expensive to investigate and solve disputes or errors.

(268) Computer breakdowns can be merely inconvenient or can have such serious consequences as denying consumers access to their accounts. ALIX GRANGER, DON’T BANK ON IT, 245-47, 249, 251, 256 (1981).

(269) Computer manipulation can be disconcertingly easy. Id. at 254.

(270) Id. at 245-47.

(271) This may occur, for example, in the case of a “remote merchant dealing with a remote foreign bank.” E.F.T., supra note 120, at 412.

(272) As a result, banks may withdraw funds from a debtor’s account a few days before depositing those funds to the creditor’s account such that the bank does not pay interest on that money during the interim. Neither is there evidence that the alleged decrease in processing costs to financial institutions have been passed on to consumers. Granger, supra note 268, at 247, 249, 251, 256.

(273) Such systems are operative in some jurisdictions in the United States.

(274) Therefore, the cardholder risks that an instrument will be dishonored wrongfully by his bank. The cardholder also risks dishonor of a valid payment instrument if funds have been frozen in his account pursuant to an open-ended transaction such as a car rental or hotel reservation. It is not clear under Canadian law whether this may be treated as a check certification and withdrawn, thus permitting the bank to dishonor payment items competing for the same funds before completion of the open-ended transaction. E.F.T., supra note 120, at 412.

(275) Id. at 412, 432.

(276) Id. at 412.

(277) However, if the EFT debit card is a third-generation smart card and verification is obtained at the point-of-sale terminal without on-line authorization from the issuer, the merchant assumes the risk that the payment item will be returned NSF. Id. at 412, 414, 416.

(278) Id. at 412, 432.

(279) Id.

(280) As a result, the paper-based debit card has been unsuccessful in Canada. On the other hand, in the United States, Master Debit and Visa Debit have flourished even though they also are paper-based debit card systems. Id. at 412.

(281) 15 U.S.C. [unkeyable] 1693 (1988).

(282) Rubin, supra note 106, at 579.

(283) 15 U.S.C. [unkeyable] 1693a(6) 1693d (1988).

(284) Id. at [unkeyable] 1693f.

(285) Id. at [unkeyable] 1693m(a)-(g).

(286) Wulff, supra note 176, at 75.

(287) Rubin, supra note 106, at 560-62, 570, 579, 592.

(288) Granger, supra note 268, at 260.

(289) See supra notes 267-75 and accompanying text.

(290) Granger, supra note 268, at 257-59.

(291) Nonetheless, controls must be imposed to prevent abuse of this data.

(292) Granger, supra note 268, at 246-47.

(293) See supra note 230.

(294) Granger, supra note 268, at 246-47.

(295) Id. at 247.

(296) Aside from physical differences (i.e. goldsmiths’ receipts were paper with ink writing, whereas debit cards are plastic with magnetic strips or microchips), one difference in the analogy between goldsmiths’ notes and debit cards is that the goldsmith’s note was merchant-driven, while the debit card is consumer-driven. In other words, goldsmiths’ notes were issued to merchants who had made deposits with goldsmiths, whereas debit cards are issued primarily to consumers who have made deposits with financial institutions. For discussion of the evolution of the goldsmith’s note or receipt, see From Commodity, supra note 8, at 144-45.

(297) See supra note 167 and accompanying text.

(298) Thompson, supra note 2, at 7, quoting F.E. (Sonny) Saunders, manager, Corporate Security, The Royal Bank of Canada “who has spent 33 years in criminal investigation.”

(299) 15 U.S.C. [unkeyable] 1693 (1988).

(300) Thompson, supra note 2, at 7.

(301) 31 U.S.C. [unkeyable] 5324 (1988). See Welling, supra, note 1 at 288.

(302) Although banks other than the Bank of England continued to issue notes, after section 6 of the Bank of England Act, 1833, made the Bank of England’s notes legal tender, these were not legal tender and were subject to the “conditional payment” principle. They were gradually phased out in England by 1921. Thus, the Bank of England retained the exclusive authority to issue bank notes, although for a short period, from 1914 until 1928 and 1933 respectively, postal orders and Treasury notes were made legal tender. From Commodity, supra note 8, at 151-53.

(303) Intriago, supra note 47, at 55.

(304) Abraham Abramovsky, Money-Laundering and Narcotics Prosecution, 54 FORDHAM L. REV. 471 (1986).

(305) CANADIAN BANKERS’ ASS’N, supra note 26, at 5.

(306) FATF, supra note 4, at 1.

(307) CANADIAN BANKERS’ ASS’N, supra note 26, at 16.