2023
Parts of a cheque may be obliterated by chemicals and then rewritten with a new payee and amount. The process is known as “cheque washing” and has become a favoured method of cheque misappropriation. This article is the first of a two-part series discussing the applicable Australian law.
“Check washing” is an American term to describe the use of chemicals to alter stolen cheques. Although I will use the more modern spelling for “cheque”, the term is too descriptive to ignore.2
According to the privately run National Check Fraud Center,3 cheque washing causes losses exceeding US$800 million per year in the USA. At least one Australian bank has warned of the practice.4
Cheque washing uses common household chemicals to lift the ink from cheques and then rewrite the payee and/or the amount. Acetone, benzene, bleach and carbon tetrachloride may all be used to remove various inks. Cheque washing is typically done on stolen cheques and the effect is difficult or impossible to detect with the naked eye. The problem is serious enough that blank cheque manufacturers are exploring special papers and technologies which will address the problem.
This article examines the legal effects of cheque washing in Australia. I will generally assume that:
the cheque is stolen;
the cheque is washed by the thief who is not a payee or indorsee of the cheque;
the washing and subsequent alterations are not authorised by any party to the cheque; and
the washing is not readily detectable.
The Cheques Act 1986 addresses the problem of unauthorised alterations to cheques. In so doing, it made some substantive changes to the way that alterations are treated under the Bills of Exchange Act 1909. Subject to s 82(3) and certain special provisions, unauthorised alterations are governed by s 78(2):
A cheque is also discharged if the cheque is fraudulently and materially altered by the holder.
This section contains several differences from the corresponding s 69 of the Bills of Exchange Act 1909. The cheque is “discharged” whereas a materially altered bill is “avoided” except as against certain parties. Perhaps more importantly, s 78(2) applies only to alterations made by the holder. The Act is silent as to the effect of alterations made by someone other than the holder.
Section 82(1) elaborates on the meaning of “discharged”:
Subject to subsections (2) and (3), where a cheque is discharged under subsection 78(1) or (2), all rights on the cheque are extinguished.
The qualification of s 81(3) relates to rights of a person who would be a holder if the cheque had not been discharged. These rights will be discussed Part 2. The qualification of s 81(2) relates to circumstances where the cheque has been discharged by renunciation of rights by the holder. It is not relevant to our discussion.
“Discharge” thus has a meaning which is similar to “avoided” as interpreted in the recent English Court of Appeal case Smith v Lloyds Bank plc.5 That case held that the avoided cheque could not be the subject of an action in conversion and that the paying bank could not debit the account of the drawer. Smith was discussed and criticised in Tyree (Tyree 2001) and Edwards (Edwards 2000).
“Material alteration” is defined by s 3(8):
An alteration of a cheque is a material alteration if it alters, in any respect, a right, duty or liability of the drawer, an indorser or the drawee institution.
This definition was intended to remove perceived injustices which occurred under the old definitions in the BEA. Section 69(2) provided a non-exclusive list of alterations where were “material”. This led to cases where a bill was held to be avoided even though the actual alteration had no significant effect.6
However, the new definition has raised its own problems. In particular, is it a “material” alteration to change the name of the payee on a bearer cheque? The obvious argument is that there is no change to the rights, duties or liabilities of the parties named in s 3(8) since the name of the payee is generally irrelevant on a bearer cheque.
The problem with the “obvious” argument is that it restricts consideration to the rights, duties and liabilities on the cheque itself, a restriction which does not derive from the section itself. There may be changes to rights, duties or liabilities which arise outside the strict confines of the cheque itself.
For example, the change in the name of the payee may have an effect on the rights of the drawee institution to a defence under ss 91–94 since each of those sections requires the cheque to be paid “without negligence”. As is well known, the definitive word on “without negligence” was given by the Privy Council in Commissioners of Taxation v English Scottish and Australian Bank:7
…the test of negligence is whether the transaction of paying in any given cheque [coupled with the circumstances antecedent and present] was so out of the ordinary course that it ought to have aroused doubts in the bankers’ mind, and caused them to make inquiry.
That was a case against the collecting bank, but the same definition has been adopted as the test for the paying bank.8 So, for example, a cheque for $5,010 made payable to “Professor Tyree or bearer” paid across the counter to a person who looked to be a tramp might not be payment without negligence.9 If that is the case, the paying bank could not rely upon the fact that a rogue had raised the cheque from one for $5000 for the purposes of a defence under s 91.
Since the definition of s 3(8) does not contain any restrictions on the nature of the ‘right, duty or liability’, it would seem that the better view is that alterations such as the one just discussed would be “material alterations”. Note, however, that the parties referred to in the section do not include the collecting bank. Alteration of the payee on a bearer cheque will nearly always change the duty of the collecting bank, but that is not relevant for the determination of whether the alteration is “material”.
A final observation is that some alterations are intrinsically “material” since they will always have the effect of altering a “right, duty or liability” of one of the named parties. An example would be the obliteration of a “not-negotiable” crossing since that would always alter the rights of the holder, namely, the right to pass a better title than he or she may have. Other alterations, such as the alteration of the name of the payee on a bearer cheque, may be “material” in some circumstances, not in others.
As noted above, s 78(2) applies only to alterations made by the holder. By s 3(1):
‘holder’ means:
in relation to a cheque payable to order–the payee or an indorsee who is in possession of the cheque as payee or indorsee, as the case may be; and
in relation to a cheque payable to bearer–the bearer.
When the cheque is a stolen order cheque, then the “washer” who makes the alteration is not the holder. The cheque is not discharged by virtue of s 78(2).
But if the cheque is not discharged, then what is the effect of a material alteration made by a non-holder?
By s 4(2):
The laws of the States and Territories and the rules of the common law (including the law merchant), except in so far as they are inconsistent with the express provisions of this Act, continue to apply in relation to cheques.
The cases and textbooks give little guidance as to when a law is “inconsistent” with the express provisions of the Act. The common law rule was that a materially altered instrument was completely invalid or, possibly, avoided except as against the immediate indorser.10 The codification of the law which resulted in the Bills of Exchange Act 1882 (UK) extended the rights of the “holder” to all post-alteration indorsers.
Is the common law rule “inconsistent” with the provisions of the Act? On one hand, “yes” since the Act deals with material alteration. On the other hand, “no”, since it does not deal with alteration by a non-holder.
The “yes” case, that the rule is inconsistent, gains some support from the observation that the CA deliberately changed the BEA and so must have been intended to have “covered the field” in its treatment of unauthorised alterations.
If the common law rule does not apply, then it must be that the alteration has no effect at all. An order cheque drawn for $10 in favour of “Alan Tyree” remain just that even though it has been “washed” to appear as a cheque for $1,000,000 in favour of “Alphonse Typhoon”.11 In particular, payment to the person purporting to be “Alphonse Typhoon” does not discharge the cheque under s 78(1)(a) since payment is made to someone other than the holder.
Similarly, alteration by a non-holder of a “not negotiable” crossing does not eliminate the protective effects of s 55 which prevents a person taking the cheque from acquiring any better title than the person from whom the cheque was taken.
In Cheque Washing - Part 2 I will consider the effects of a washed cheque on the rights and liabilities of various parties.