New Zealand banks don't have to accept cheques from overseas, and may not accept them from some countries, so check with your bank before taking a foreign cheque as means of payment. Foreign cheques take longer to process, and don’t go through the New Zealand cheque clearance system.
Banks clear foreign currency cheques in one of two ways.
The bank converts the foreign cheque into New Zealand dollars (using that day’s exchange rate) and deposits the money into the customer’s account. In doing so, the New Zealand bank is lending money to the customer while it waits for payment from the overseas bank. The New Zealand bank may allow the customer immediate access to the money, but will reverse the amount if the foreign cheque is dishonoured later by the overseas bank (if, for instance, there isn't enough money in the overseas bank account or the cheque has been stolen).
Alternatively, the New Zealand bank may place a hold on the money for a certain period, meaning the customer cannot access the funds immediately. The hold period allows time for the overseas bank to advise the New Zealand bank whether it will dishonour the cheque. Once the hold period expires, the customer can access the funds. A foreign cheque can still be dishonoured after any hold period ends.
If a cheque is dishonoured, the cheque’s value will be converted back into the foreign currency (using the exchange rate when the bank is advised the cheque is dishonoured) and the amount deducted from the customer’s account. If the exchange rate has changed since the original deposit, the customer’s account may be debited for an amount greater than the original cheque. If dishonouring the cheque causes the customer’s account to be overdrawn, the customer must pay back the bank.
The second clearance method is for the New Zealand bank to send the cheque to the overseas bank to be processed. When the New Zealand bank receives the money from the overseas bank, it converts the money into New Zealand dollars and deposits the money into the customer’s account.
This method is usually used for higher-value cheques. Banks will also use this method when they are not prepared to advance funds to their customer while they wait for payment from the overseas bank. This may be because the customer does not meet their credit criteria or because the cheque is a personal one.
The on-collection method gives customers certainty of payment and removes exchange risk should the cheque not be paid. This process may also be better when a customer receives a cheque from someone he or she does not know well and wants to be certain the cheque won't be dishonoured later.
The clearance process is a cause of complaints. Customers may not know about the hold period and get concerned about the delay in accessing the money. Customers may also not know that a foreign cheque can be dishonoured after they've accessed the money. And some customers complain about exchange rate changes when a cheque is dishonoured.
A bank’s terms and conditions for accepting foreign cheques should clearly explain that:
- A cheque can still be dishonoured after the hold period ends
- The bank can require the customer to repay the cheque amount if that happens.
- The customer may incur extra costs arising from exchange rate movements.
Banks must give accurate and complete answers to customers' questions about clearance times and the process they adopt when a foreign cheque is dishonoured.
The most common scam involve people who sell goods online and accept a foreign cheque as payment. The seller will bank the cheque and either send the goods straightaway or wait until the hold period ends, thinking the cheque has cleared. The cheque is subsequently dishonoured and the seller’s bank debits his or her account to cover the cheque amount. If the customer has insufficient credit funds in the account, the account will be overdrawn.
Exchange rate risks spelled out clearly
David would sometimes transfer money from his bank account in the United Kingdom to his bank account in New Zealand. He found the cheapest way to do this was to write a cheque in pounds sterling and present it at his local branch in New Zealand. The money would be converted at the day's exchange rate and go into his New Zealand account the same day, but held uncleared for up to 21 days.CASE 2
Bank not responsible for scam victim's loss
Hamish began corresponding online with Sophia, who claimed to live in Malaysia. Hamish believed they were in a romantic relationship. Sophia told him she was selling her Dubai house and needed money to pay sales taxes. She asked Hamish if she could send him a cheque to deposit in his account and send her some of the money, and keep the rest for himself. Sophia said she couldn't bank the cheque herself because she was living in a hotel and had no proof of residential address to give her bank.CASE 3
Bank entitled to use less risky clearance method
Sarah regularly received cheques of £1,000 from her family in the United Kingdom. She would deposit them at the local branch of her bank. The bank would charge a small fee and immediately deposit the value of the cheque into her bank account, applying the exchange rate of the day.
Cheques, although in declining use, still generate complaints, usually about how long it takes to clear funds. A cheque, once deposited, can take three to five working days to clear, and even longer for overseas cheques. If you deposit a cheque into your account, check with your bank that the money has cleared before you consider it yours.
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