Client trust accounts going digital, too

By Diane Karpman

Karpman

Don’t go into cardiac arrest if you open the client trust account statement from your bank and your canceled checks are missing. Rule of Professional Conduct 4-100 (Standard (1)(c)) requires that a lawyer maintain for five years all bank statements and canceled checks. Everyone knows that the easiest way to lose your license is to violate the stringent trust account record-keeping standards. On Oct. 28, when “Check 21” becomes the law, you may no longer receive the original checks, and banks will be permitted to destroy them.

“Check 21” (the Check Clearing for the 21st Century Act) will cause check processing in the United States to soar into this century. Before Check 21, financial institutions were required to physically transport original checks to the banks that issued them. (Yes, 42 billion checks flew all over the country.) Banks will now be able to beam digitalized copies of checks to the issuing bank and — voila, the check can be paid immediately. This federal act applies to all checks, including cashier’s checks, money orders, travelers’ checks, etc.

Prudent lawyers would never, ever take advantage of the “float” on a trust account check. “Float” was the term employed to describe the informal grace period that existed between the time when the check was written and when it cleared at the home bank. With Check 21, if you issue a check in the morning, it could clear that afternoon. There is no float.

The American Bankers Association (the other ABA) lobbied Congress for this one, because although it terminates “floats,” it has no impact on “holds.” “Holds” are provincial bank delays on availability of deposits. For example, a hold could be placed on a new account, a large deposit, a repeat over-drafter or a redeposited check. Holds can be two days, or as long as 30 days. Because of inconsistent holds, millions of NSF checks will be issued, resulting (of course) in overdraft fees for banks. The consumers’ confusion caused by this unprecedented change could result in overdraft fees becoming a new “profit center” for the 9,000 banks in the United States, not to mention the windfall savings in paper and transportation costs.

Banks will issue substitute checks, which are essentially electronic image replacement documents (IRC’s). If you are preventing trust account mistakes by using a different color paper stock, this will no longer work, because copies are black and white.

There is potential confusion and chaos for lawyers because the decision to convert to IRC’s is made by the payee’s bank. In terms of compliance for the bar, you can’t very well “maintain” something you never received.

Electronic data degrades faster than paper, it is less reliable and data can become irretrievable due to software innovations. Digitalized electronic copies are extremely fragile. Consider how degraded old facsimiles are when compared to the Dead Sea Scrolls. Then, imagine how difficult it will become to prove that a rogue employee, or some other malevolent person, forged a signature.

• Ethics expert Diane Karpman can be reached at karpethics@aol.com or 310/887-3900.