The Cheque is More than a Payments Instrument

Stanley Epstein, Principal Associate, Citadel Advantage

So the venerable old cheque has been singled out and “tapped” for termination – in the UK at least. Of course, in the new world of electronic payments and instantaneous communications, the demise of the cheque was inevitable. A payment instrument devised in a simpler time, the cheque representing a negotiable claim on the bank account of the drawer, was a major innovation in its day. It represented a new way to make payments in a manner that avoided the actual transfer of cash or bullion. The humble cheque as a payment instrument spawned other major innovations such as the clearing and settlement processes that are major features of all electronic payment, clearing and settlement systems to this very day.

As a payment and a financial instrument, the cheque reigned supreme for over two centuries and spread across the face of the globe. But, as with all empires, the cheque’s star must eventually set. The cheque has become an anachronism in today’s high-tech, high-speed world. It is an expensive system to operate and worst of all its “flow” is all the wrong way.

In a technology driven, high-speed, risk averse world the way in which the cheque operates is a barrier to the smooth high-speed payments processing operation that puts all the right checks and balances in the right places and in the right sequence.

All other payment types flow from the payer to the payee (now that is a simple word for the receiver that today seems to have gone out of fashion). The opposing flow of the cheque from the recipient (payee) to the payer’s bank is just a hindrance to modern processing practices as well as a huge source of risk.

Of course the cheque is more than a payment instrument, though many people do not know this. The cheque served (and still does in many places) a multiplicity of financial roles, vital in day-to-day business activities.

Just consider four of these.
1. A means of commercial and consumer credit,
2. An access point to commercial bank lending,
3. A medium of exchange, and
4. A payment instrument.

In many countries, even today, the cheque still serves as a credit and loan instrument. Post dated cheques give buyers credit extended by a merchant or store, while the self-same cheques with their legal basis and their negotiability give that same merchant immediate access to discount facilities (i.e. the cash) at commercial banks.

During the six and a half month bankers strike in Ireland in 1970 the humble cheque served as a medium of exchange too, with very little default once the banks got back to operating again.

Until recently in most countries the only “payment” law in existence was that relating to the cheque. Cheque laws and banking laws run hand-in-glove. The legal corpus surrounding other types of payment instruments is, with a few exceptions, sketchy and in some cases nonexistent. Within the realms of the law the cheque or “Bill of Exchange”, which it really is, still has a lot of life left in it. Most countries created significant laws and legal principles based on the cheque/ bill of exchange.

The bill of exchange still remains the basic instrument of international trade and finance. While the UK may well abolish the use of the cheque for day-to-day payments purposes it is unlikely that the instrument will suffer an ignominious end. Trade practices and international conventions will ensure that the cheque/ bill of exchange will still be with us for a long time to come.

Training Course - Risk Management - Focus on Fraud

Join us in Madrid, Spain on 22 & 23 February 2010 for our 2-day training course “RISK MANAGEMENT - FOCUS ON FRAUD.”

Fraud is on the increase. Recent studies have shown a surge in economic crimes. The statistics reveal that the three most common forms of crime are theft, accounting fraud and corruption.

Of these, fraud has shown a particularly sharp rise. The rise in fraud stems from a mixture of increased opportunities and growing incentives. Companies have been reducing the number of people employed to monitor workers at a time when employees are more tempted to break the rules because their living standards are eroding and their jobs are looking shakier. The proportion of frauds committed by middle managers has shown a particularly sharp rise, from 26% in 2007 to 42% today.

Just consider the following questions;

• Can your bank or organization cope with fraud?
• Can you identify a fraud in your working environment?
• Are you maximizing your staffs’ potential to reduce fraud and error in your systems?
• How aware are you or employees of fraud?
• Do they have a clear understanding of the role they play in detecting fraud?
• Do they understand you organization’s fraud policies and procedures?

The “Risk Management - Focus on Fraud” course in Madrid on 22 & 23 February 2010 is a 2-day intensive course on fraud and how it presents huge challenges for banks, requiring them to radically modify behavior and increase their vigilance in many of the traditional risks associated with banking activities.

Ensure that your staff are able to cope with the growing fraud threat.For more details including a fully descriptive course brochure e-mail us at courses@citadeladvantage.com today. Please indicate FRAUD-MADRID in the subject line.

Training Course - Migrant Worker Remittances - Issues & Opportunities

Join us in Johannesburg, South Africa on 25 & 26 January 2010 for our 2-day course “MIGRANT WORKER REMITTANCES - ISSUES & OPPORTUNITIES.”

Money sent home by migrants constitutes the second largest financial inflow into many developing countries, exceeding even international aid. Remittances contribute to economic growth and to the livelihoods of needy people worldwide. Moreover, remittance transfers can also promote access to financial services for the sender and recipient, thereby increasing financial and social inclusion.

Although African workers send home more than US$40 billion to the region each year, restrictive laws and costly fees hamper the power of remittances to lift people out of poverty, according to a recent report by the UN's rural poverty agency, the International Fund for Agricultural Development (IFAD).

Even if your organization already has a Remittance Program or Product, this course will be of immense value to you and your staff.

Remittances are not as simple as a monetary transfer from A to B. It is the fine details of the remittance processes and the subtle nuances of being a stranger in a foreign land or simply a receiver in a remote location in one’s own country that constitute the major problems for remitters and receivers.

Get to grips with these and other uniquely African problems faced in providing remittance services in this region.

Understand how new technologies - such as the mobile phone - and existing infrastructure - particularly post offices or small retail outlets - could vastly increase the reach of remittance services.

Learn about the unique problems being faced by both Remitters and Receivers – problems that banks and other financial institutions are uniquely placed to help solve.

Remittances represent a huge business opportunity for banks and other organizations to satisfy the needs of this huge and growing market.

Cement your position in the Remittance Market by attending “MIGRANT WORKER REMITTANCES - ISSUES & OPPORTUNITIES” in Johannesburg on 25 & 26 January 2010.

For full details including a Course Brochure e-mail us at courses@citadeladvantage.com Please state REMIT-JHB in the subject line.

How to Fit a Password - Learn about the Most Popular Passwords on the Internet

A fascinating view of a total lack of security consciousness. You need to read this article in the Ecommerce Journal. Access it by clicking on the article title below.

How to fit a password, learn about the most popular passwords on the Internet Ecommerce Journal

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Technology is Revolutionizing Payments and Remittances

Are you thinking outside the box? I have come across this video on YouTube by Dr. Patrick Dixon. Patrick Dixon is a Futurist, author 12 books including Futurewise, conference speaker who works with many of the world's largest corporations on global trends, new technology forecasts, biotech, health care, marketing, risk management, product design, innovation, motivation and customer insight.

Here he talks about mobile payment systems, micropayments, mobile phone credit card transactions and loans. This is thinking outside the box at its finest. As a bank or financial institution are you up to the “Technology Challenge” or will you lose you advantage to those bold enough to seize the day and step into the future?

Computer Programmers Charged in Madoff Affair

The Securities and Exchange Commission has accused Jerome O’Hara and George Perez of provideing the technical support necessary to produce false documents and trading records, and took hush money to help keep Bernard Madoff’s massive Ponzi scheme going.

Last week the two computer programmers were charged for their role in helping Madoff cover up the fraud for more than 15 years. The SEC alleges that the two provided the technical support necessary to produce false documents and trading records, and took hush money to help keep the scheme going.

“Without the help of O’Hara and Perez, the Madoff fraud would not have been possible,” said George S. Canellos, Director of the SEC’s New York Regional Office. “They used their special computer skills to create sophisticated, credible and entirely phony trading records that were critical to the success of Madoff’s scheme for so many years.”

According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, Madoff and his lieutenant Frank DiPascali, Jr., routinely asked O’Hara and Perez for their help in creating records that, among other things, combined actual positions and activity from BMIS’ market-making and proprietary trading businesses with the fictional balances maintained in investor accounts. O’Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corporation (DTC) reports and other phantom books and records to substantiate nonexistent trading. They assigned file names to many of these programs that began with “SPCL,” which is short for “special.”

A separate computer internally known as “House 17” was used to process BMIS investment advisory account data at the direction of Madoff, DiPascali and others. The SEC alleges that O’Hara and Perez knew that the House 17 computer was missing a host of functioning programs necessary for actual securities trading and reporting. According to the SEC’s complaint, they recognized that the trades being entered into House 17 and the account statements and trade confirmations being sent to investors did not reflect actual trades.

The SEC alleges that O’Hara and Perez had a crisis of conscience in 2006 and tried to cover their tracks by attempting to delete approximately 218 of the 225 special programs from the House 17 computer. But they did not delete the monthly backup tapes. O’Hara and Perez then cashed out hundreds of thousands of dollars each from their personal BMIS accounts before confronting Madoff and refusing to generate any more fabricated books and records.

According to O’Hara’s handwritten notes from the encounter, one of them told Madoff, “I won’t lie any longer. Next time, I say ‘ask Frank,’” meaning that Madoff should rely on DiPascali alone to create the false data and reports.

The SEC’s complaint alleges that Madoff responded by telling DiPascali to offer O’Hara and Perez as much money as necessary to keep quiet and not expose the misrepresentations. O’Hara and Perez considered the offer and demanded a salary increase of nearly 25 percent along with one-time bonuses in late 2006 of more than $60,000 each. They stated to DiPascali at the time that they did not ask for more because a greater amount might appear too suspicious. DiPascali then managed to convince O’Hara and Perez to modify computer programs so that he and other 17th floor employees could create the necessary reports themselves.

This is the SEC’s latest enforcement action concerning the Madoff fraud since the scheme collapsed last December. The Commission previously charged Madoff and BMIS, DiPascali, and auditors David G. Friehling and Friehling & Horowitz CPAs, P.C. The SEC also charged certain feeders with committing securities fraud through a Ponzi scheme perpetrated on advisory and brokerage customers of BMIS. Madoff, DiPascali and Friehling have all pleaded guilty to criminal charges related to their conduct.

Among other things, the SEC’s complaint seeks financial penalties and a court order requiring O’Hara and Perez to disgorge their ill-gotten gains.

“Quants” say their bosses don't understand them

A staggering two thirds of quantitative analysts (Quants) think their supervisors do not understand the work they do, according to a survey from training firm “7city Learning”.
The poll of almost 400 active quants and risk professionals reveals a significant gap in understanding between them and their supervisors.

Quants and risk managers have been pointed to by many economists as one of the principle reasons the global financial crisis escalated so precipitously.

Yet 86% of quants feel their supervisors' level of understanding of the job of a quant is the same or worse than it was a year ago. In addition, 70% feel that the level of understanding of the role of quants within their institutions has decreased or has not changed at all from a year ago.

Paul Wilmott, director of 7city's Certificate in Quantitative Finance course, says: "These numbers are alarming. They indicate that even with the events of the past year, financial institutions are still not taking the importance of financial education seriously, especially as it pertains to improving relationships and understanding between quants and their managers."
A recent report by financial regulatory agencies called on financial services firms to make substantial and sustained investments in IT infrastructure if they are to overcome severe underlying weaknesses in their risk management capabilities.

The Senior Supervisors Group (SSG) that comprises watchdogs from seven countries (United States, Canada, France, Germany, Japan, Switzerland, United Kingdom) says that underlying weaknesses in governance, incentive structures, information technology infrastructure and internal controls require substantial work to address.