Truncation, a New Alternative Seeking to Provide Agility to the Financial System for the Collection of Checks
Carlos Fernández, lawyer in El Salvador and expert in Financial and Corporate Affairs, shares this article on Check Truncation, a new alternative that, through the use of technology, seeks to provide agility in the collection of checks.
On April 11 of this year, Legislative Decree Number 972 was published in the Official Gazette. This contains the amendment to the Commercial Code added in Book Three, Title II, Chapter VIII, Section "F" on CHECK TRUNCATION, including Sections 838-A, 838-B, 838-C, 838-D, and 838-E.
According to Section 838-A, "Check truncation is a procedure by which the physical exchange of the check is reduced or eliminated as a precondition for the release of funds to the final beneficiaries, being replaced by electronic records that include the image of the check, for its automatic processing or transmission".
The objective of this new measure is to shorten the time required for the payment of checks cashed by users at different banks.
Focused on check clearing, a process by which banks exchange checks deposited in different financial institutions, truncation emerges as a technological alternative to shorten the time for cashing checks. This allows users to access funds deposited across various financial institutions more quickly.
As established in Art. 838-B of the Commercial Code, the Central Reserve Bank will regulate and manage the clearing process of checks and other payment systems between banks and other financial institutions.
Although for the moment the elaboration of the applicable regulations is currently in process, the objective is for a check within the clearing system, through images containing its essential elements in electronic form or other authorized means, to produce the same effect at the time of truncation as the presentation of a physical check.
The reform to the Code of Commerce regarding the truncation of checks has also introduced administrative infractions related to actions or omissions associated with this procedure. These infractions include:
- Unjustified refusal by a banking institution to carry out the truncation of checks as stipulated by the Commercial Code.
- Delaying the procedure outlined in this chapter for the clearing of checks.
- Altering, intervening or interrupting the computer system enabled for the clearing of checks.
- Failure to deliver the certification of the check image to the applicant.
- Failure to immediately credit clients once the funds have been received from the liquidator.
Likewise, the reform will allow participants in the clearing system ninety days to regulate the check clearing process from the effective date of the rules issued by the Board of Directors of the Central Reserve Bank in this matter.
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