I. Introduction/Rationale
Much had been written about the negotiable instruments, and more had they been
used. Offers in writing, addressed by one person to another, signed, and promising to pay
a specified person or bearer a fixed sum in exchange for goods in certain future time.
Negotiable instruments are critical to our economy. They allow people to do business and
to be certain that they will receive money for their services or goods without the actual
transfer of cash. In the world of business and finance, negotiable instruments are a very
important tool. They provide the parties with an ease of doing business. And they can also
be a source of finance when in need of funds. The concept of a 'negotiable' instrument is
very important in overseas trade. Among instruments now legally recognised as negotiable
are Bills of Exchange, Promissory Notes, Cheques, Exchequer Bills, Bank Notes, Dividend
Warrants, Share Warrants, Banker's Circular Notes, Debentures payable to Bearer.
The remarkable discovery of negotiable instrument is a very helpful thing in the
commercial world. However, in the 21st century the traditional negotiable instruments
could be deemed unsatisfactory for business, unclear and of dubious nature. As computers
had taken over the markets in an effort to ease the burden on international trade, negotiable
instruments had been viewed as obsolete by many due to their original paper form.
Another point of criticism is the fact that the Bill of Exchange Act 1882 had been
regulating the usage of negotiable instruments from a time when the use of negotiable
instruments could have been deemed as invaluable in trade – which is not the case of today,
having the world trade currencies of the US Dollar, Japanese Yen and the European
Union’s own Euro. The Uniform Commercial Code (of the United States of America) had
also been at the scene, however both significant pieces of legislation must now stand the
test of the electronic negotiable instruments.
This legal research aims to identify essential laws and reasons which make
negotiable instruments irrelevant in the banking system. Are negotiable instruments really
irrelevant now especially in the banking system? The evolution in recent years of
alternatives to the check system, such as credit card systems and electronic funds transfer
systems, has prompted considerable interest in the law of payment systems. This evolution
also touched the issues on second endorsement of the checks. Issuances and real practical
discretion of the bank in limiting acceptance of second endorsed letter created a cloud on
the applicability of negotiable instruments law in the banking system. Thus the goal of this
research study to clear the cloud on the matter.
Statuos quo/laws
CIRCULAR LETTER
Series of 2002
TO : All Banks
Pursuant to the provisions of item 8, Circular No. 251 dated 7 July 2000, requiring banks to adopt
reasonable measures to prevent the use of their facilities for laundering of proceeds of crimes and
other illegal activities, all banks are hereby enjoined to adopt stricter policy guidelines in the
acceptance of second-endorsed checks to ensure that they are not being used as instruments for
money laundering or other illegal activities.
For this purpose, banks should limit the acceptance of second endorsed checks from properly
identified clients and only after establishing that the nature of the business of said client justifies,
or at least, makes practical the deposit of second endorsed checks. In case of isolated transactions
involving deposits of second endorsed checks by clients who are not engaged in trade or business,
the identity of the first endorser should be established and the record of the identification shall
also be kept for five (5) years. It is also understood that banks shall at all times follow the Know-
Your-Customer (KYC) rules whenever they handle or transact second endorsement checks.
This Circular-Letter shall take effect immediately.
Practical Basis on the Inapplicability of the concept of Indorsement in the Banking System
Second endorsed checks may be accepted but in a limited sense. Client must have a Second Endorsed Check Line
subject to conditions. A case to case basis acceptance of second endorsed checks may also be accepted in cases where
the payee of a check is the signatory of a corporate account and such check is deposited to the corporate account.
Checks with payee’s name followed by “or Cash” is strictly not acceptable as Philippine Clearing House
Commission’s mandate.
Telephone Interview with Prescillepearl C. Baril, Branch Operations Head, China Banking Corporation
(November 26, 2019).
Second endorsed checks are strictly not acceptable. Acceptance of SEC are rarely accepted. We are really strict
with it. For example, A check payable to ABC Inc. but the bank account name is ABC Incorporated is not
acceptable.
Telephone Interview with Jay-Nova S.Potot, Operations Office, Security Bank Corporation (November 26,
2019).
Second endorsed checks are by default not allowed but subject to further approval may be accepted.
Telephone Interview with Shaira Melissa Hernandez, Assistant Manager, Bank of the Philipine Islands
(November 27, 2019).
III. Analysis/Discussion
No existing laws explicitly and clearly repeal the Negotiable Instruments Law of the
Philippines. It is still used and been using by all business transactions. However, with the birth
of increase awareness to fraud cases, the banks now are more vigilant to fraud incidents
involving second endorsed checks. There has been recorded fraud cases involving this second
endorsed checks. As a result thereto, the Bangko Sentral issued a 2002 Circular containing an
advice to limit the acceptance of second endorsed checks.
Second-endorsed checks are checks which are presented for payment not by the payees
but by subsequent holders to whom the checks were endorsed by the payees. Normally, checks
are deposited with a collecting bank with the payees signing their endorsement on the checks.
This act constitutes the first-endorsement of these checks. If instead of depositing the check,
the payee endorses the check to a third party and such third party in turn deposits the check
to his bank account, such act by the third party now constitutes a second-endorsement. Such
second-endorsement is not prohibited by law, as in fact, it is a recognized transaction under
the Negotiable Instruments Law. Thus, acceptance by banks of second-endorsed checks is not
illegal. Yet, some banks have adopted internal policies which disallow outright acceptance of
these checks. Some other banks may allow acceptance in very limited instances and subject to
strict risk controls. The policy on the acceptance of these checks differs from one bank to
another.
Related to this subject, the Bangko Sentral in a 2002 Circular Letter advised as follows:
“(B)anks should limit the acceptance of second-endorsed checks from properly identified
clients and only after establishing that the nature of the business of said client justifies, or at
least, makes practical the deposit of second-endorsed checks. In case of isolated transactions
involving deposits of second-endorsed checks by clients who are not engaged in trade or
business, the identity or the first endorser should be established and the record of the
identification shall also be kept for five years. It is also understood that banks shall at all times
follow the Know-Your-Customer (KYC) rules whenever they handle or transacts second-
endorsement checks.”
The above-mentioned Circular Letter was supplemented by a 2004 Circular Letter
which enjoined banks “to take the necessary precaution in accepting deposit of second-
endorsed dividend checks, especially those in unusually large volume. Banks should examine
thoroughly dividend checks with particular attention to the payee’s endorsement.”
What can be gathered is that the acceptance of second-endorsed checks is a matter
of serious policy concern. Unless the first-endorser is a client of the collecting bank, it
would be very difficult for that bank to verify the authenticity of his endorsement, such
that if it turns out that the same is a forgery, the bank can be held liable for the amount of
the check. This is because once the collecting bank sends the check for clearing, it is
required, under clearing rules, to warrant the genuineness of all prior signatures appearing
on the check.
Of course, the collecting bank can proceed against its depositor who deposited the
second-endorsed check, and that is, if said depositor has remained a bank client and has
sufficient funds or a credit line to cover the loss. The bank can adopt risk safeguards which
may have to be maintained for a long time because, under the law, the payee (whose
signature was forged) has five years to file a claim counted from the discovery of the
forgery. That will be a long wait for the collecting bank.
Another risk that the banks should guard against is the use of second-endorsed checks
as a medium for money laundering arising, for example, from a syndicated theft of dividend
checks and the forgery of the signatures of the payees thereof, or the evasion by money
launderers of the KYC rules by endorsing checks payable to them to third parties.
Special Law versus Circulars
While it is clear that there is specific circular issued by Banko Sentral limiting the
acceptance of the banks of the second endorsed check, let us now know the power of Special law
versus Circulars as issuances.
Executive Order No. 292, Section 50 defines circulars as issuances prescribing policies,
rules and regulations, and procedures promulgated pursuant to law, applicable to individuals and
organizations outside the Government and designed to supplement provisions of the law or to
provide means for carrying them out, including information relating thereto.
Courts have held that instructions given by a statutory body under its rule making powers
dealing with service matters are not considered to have statutory backing and hence are not
enforceable, as such instructions are a mere declaration of policy. Therefore, the lack of statutory
force can be seen as the reason for the non-binding nature of the administrative instructions. While
the main purpose of administrative instruction is to fill the lacunae in the statutes and supplement
the rules and regulations, it is often observed that such instructions directly trench upon the ambit
of the legislature. This gives rise to confusion as to whether the statute will be binding or the
administrative instructions. Further, many a times an administrative instruction is nullified by the
enactment of a statute. There have been instances where administrative directions were found to
be inconsistent with the judicial decisions on the one hand and judicial decisions that are
incompatible with administrative directions on the other. Administrative decisions issued by
executive authority cannot supersede a statutory provision.
The Circular 2002 issued by the BSP is an example of issuance which provides means in
carrying laws related to second endorsed checks.
It is clear therefore that circulars do not supersede special laws.
IV. Conclusion
No existing laws explicitly and clearly repeal the Negotiable Instruments Law of the
Philippines. It is still used and been using by all business transactions.
As computers had taken over the markets in an effort to ease the burden on
international trade, negotiable instruments had been viewed as obsolete by many due to their
original paper form. But it is still a fact that despite the obsolete form of this instruments, their
use is till been enjoyed by many though in a limited form.
As to the issue on endorsement, second endorsement is contained in the Negotiable
Instruments Law of the Philipines, however there was a cloud created with this application
with the issuance of circular 2002 issued by the BSP which limits acceptance by the bank of
second endorsed checks. It is now clear that second-endorsement is not prohibited by law, as
in fact, it is a recognized transaction under the Negotiable Instruments Law. Thus, acceptance
by banks of second-endorsed checks is not illegal. The circular is only an advice enjoining
banks to adopt stricter policy guidelines in the acceptance of second-endorsed checks to ensure
that they are not being used as instruments for money laundering or other illegal activities.
Therefore, the negotiable instruments law of the Philippines is not irrelevant in the
banking system but there is already a limitation as to its use. To some extent, commercial law
is a reflection of customs and usages of trade in the business world. The development of the
law concerning commercial paper—checks, promissory notes and the like—grew from
commercial necessity and its use is affected now by the technology.