Banks are encouraged to use extreme caution when dealing with a check drawn on a bank located in another country. Banks located outside the United States are not required to follow the Federal Reserve rules for processing and return of checks.
Recently, increased attention has focused on the marked increase in the number of returned Canadian checks. Special care must be taken when a bank decides to accept Canadian checks. Checks drawn on Canadian banks that are accepted by U.S. banks and processed through the Federal Reserve are not subject to the provisions of the Uniform Commercial Code. As a result, banks must use special care when establishing funds availability for Canadian items.
Banks should be aware that credit for Canadian cash letters is provisional and that the time for return of Canadian checks varies under Canadian law. Under Canadian law, a check that contains a forged maker’s signature can be returned unpaid by the paying (drawee) bank only by the next business day after presentment. However, there is no time period for submitting a claim of forged endorsement. Because Canadian banks are not subject to U.S. banking regulations, banks may not assert a claim of late return through the Federal Reserve Bank against a Canadian bank. Also note that Canadian checks returned for insufficient funds, forged signature or endorsement may not be redeposited for collection. The fee for handling checks returned by Canadian paying banks is charged to the bank. There is no legal basis upon which the Federal Reserve can charge paying banks in Canada for handling returned items as there is for charging domestic paying institutions that return checks through the Federal Reserve System.
Another consideration in handling Canadian checks is that the exchange rate applicable to returned Canadian funds items is the rate prevailing at the time the Canadian correspondent bank receives the checks from Canadian paying banks. The possibility that this prevailing exchange rate is higher or lower than the original rate applied during forward collection creates the potential for a gain (from a lower rate) or loss (from a higher rate) for the bank based on the difference between the rates used during forward collection and return handling.
When accepting foreign checks for deposit, the bank needs to be aware of the different laws that apply to these items and govern its funds availability on items drawn on a foreign bank, accordingly.