Checks Without Cover
Function of the Checks Without Cover Section at the Bank of Israel
- The Checks Without Cover Section at the Bank of Israel operates under the Checks Without Cover Law, 5741–1981, and the regulations and rules established by force thereof.
- The Unit receives information from banks and other entities (Enforcement and Collections Authority, rabbinic courts, the Official Receiver, and the Center for the Collection of Fines, Fees, and Expenses) about the restriction of accounts and/or customers under the law, and shares this information with all banks, additional entities, and entities licensed under the Credit Data Service Law, 5762–2002.
- If the conditions for the restriction of a customer under aggravated circumstances apply, the Bank of Israel sends notice to this effect to the customer, the Banks, and additional entities. (Notice about ordinary restriction is served by the bank.)
- The Section handles inquiries relating to restricted accounts and customers, but is not authorized to intervene directly in the decision of a bank that announced the restriction of an account or refused to honor a check. Similarly, the Section is not authorized to deal with a restriction imposed by force of law.
Section 2(a) of the law restricts an account for one year if ten (or more) checks without cover were drawn on it over a twelve-month period and if the bank returned them for this reason. To protect customers for whom the return of a sizable number of checks was a nonrecurrent and exceptional event, the law states that the account shall not be restricted if the first check and the tenth check were returned within a period of fewer than fifteen days.
Implications of the restriction of an account and a customer
The restriction of activity is manifested in the classification of the account as a “restricted account” and of its owner as a “restricted customer". It is prohibited to draw checks on a restricted account. This means that the bank will not honor checks drawn on such an account for the restriction period, due to “restricted account” status. However, if a restricted customer has an additional account that is not restricted, he may continue to draw checks on that account.
- A restricted customer may not open a new checking account at any bank whatsoever. This prohibition pertains only to an account in Israeli currency on which checks are drawn.
- A restricted customer may not receive power of attorney or be named an authorized signatory of a new account on which checks are drawn.
- Note: a restricted customer may open a non-checking account provided there is no other impediment to opening the account. The refusal of a bank to open a non-checking account solely because the customer is restricted does not constitute reasonable refusal to open the account.
To read the Supervisor’s circular on unreasonable refusal to open an account (In Hebrew)
Such a customer may also continue to transact in the restricted account in cash, receive deposits in it, and take any action other than drawing checks on the account.
How long does an ordinary restriction last?
The term of the restriction is one year. This period begins on the date appearing in the bank’s notice to the customer about the restriction of the account, which must be at least fifteen days after the date on which said notice is sent to the customer.
Can an account be opened for a restricted customer during the period preceding the onset of the restriction?
From the time notice of the restriction is sent, and during the subsequent fifteen days, the account is in a “waiting period” pending restriction. During this time, no checking account may be opened for the customer.
To whom does the restriction apply?
The restriction applies to the account and the account holders recorded with the bank on the day the conditions for the imposition of the restriction are met, regardless which member of the account drew the checks.
Note: The restriction does not apply to a holder of power of attorney in the account even if s/he is the person who signed the uncovered checks.
Additional cases include the following:
- Corporate account—A limited-liability corporation is a legal entity established under law. A corporate account shall be restricted on the basis of the corporation’s “ID number” (private corporation number). Its authorized signatories shall not be restricted under their ID numbers, meaning that they may continue drawing checks on their personal accounts.
- Sole Proprietorship account—For restriction purposes, a sole proprietor’s business account falls under the same rules as a private customer’s account. (Restrictions are reported on the basis of the account holder’s ID number.)
Accounts of workers' committees and representatives of condominiums—If an account belonging to one of these entities is restricted, the entity is marked as restricted but its authorized signatories are not restricted.
Restriction under aggravated circumstances
A customer who meets the following conditions is restricted under aggravated circumstances:
- He or she has an additional account restricted during the restriction period;
- A former restricted customer who was restricted again within 3 years of the end of the first restriction term—either for the same account or for another account.
What are the implications of restriction under aggravated circumstances?
- All checking accounts in the customer’s name are restricted. This includes joint accounts in which the customer is a member, and accounts for which the customer holds power of attorney. It does not include accounts in which the customer is an authorized signatory. This means that the customer may not draw checks on any of these accounts.
- A customer who is restricted under aggravated circumstances may not open a new checking account at any bank whatsoever. This provision applies only to an account in domestic currency on which checks are drawn.
- A customer who has been restricted under aggravated circumstances may not be given power of attorney or named authorized signatory in a checking account.
- A customer who has been restricted under aggravated circumstances may open a regular non-checking account provided no other impediment to opening the account is present.
The refusal of a bank to open a non-checking account solely because the customer is restricted does not constitute reasonable refusal to open the account.
To read the Supervisor’s circular on unreasonable refusal to open an account (In Hebrew), click here.
Note: Such a customer may also continue to make cash transactions in the restricted account, receive deposits in it, and take any action other than drawing checks on the account.
How long does a restriction under aggravated circumstances last?
Customers and accounts that have been restricted under aggravated circumstances are restricted for 2 years.
What is the status of an account in which the holder of power of attorney has been restricted under aggravated circumstances in respect of another account?
When a customer is restricted under aggravated circumstances, an account in which he or she holds power of attorney is also restricted. This means that the customer may not draw checks on the latter account. The holder of an account that is restricted in this manner because of the holder of power of attorney may approach the bank and advise it of the cancellation of the power of attorney, whereupon the restriction of the account in which the holder of power of attorney had been authorized to draw checks will be rescinded.
Does the restriction under aggravated circumstances of an authorized signatory in a corporate account result in the restriction of the corporate account?
The law states that restriction under aggravated circumstances of an authorized signatory in a corporate account does not result in the restriction of the corporate account. However, the authorized signatory who was restricted under aggravated circumstances is not allowed to draw checks on any account, including those of the company.
How is a member in a joint account affected when another member is restricted under aggravated circumstances in a different account?
When a customer is restricted under aggravated circumstances, all of his or her accounts are restricted, including joint accounts in which he or she is a member, even if checks drawn on the joint account were not returned. While no checks may be drawn on the joint account after the restriction is imposed, a member who is not a restricted customer may continue to draw checks on other accounts that he or she has, and may open a new checking account.
Restriction under special circumstances
The law allows restriction under special circumstances in the following situations:
- Debtors who have been restricted by the courts as part of bankruptcy proceedings;
- Debtors on whom a restriction has been imposed by the Enforcement and Collections Authority as part of proceedings involving the collection of debts;
- Debtors who have been restricted by the Center for Collection of Fines, Fees, and Expenses, as part of debt collection proceedings vis-à-vis government authorities and other entities and corporations.
- Persons who refuse to grant letters of divorce, provided the rabbinical court has issued a restriction order against them.
Apart from the period of the restriction, which may last from one year to five years in the aforementioned cases as determined by the authority competent to impose the restrictions, the rules applying to a customer who is restricted under special circumstances are identical to those applying to customers restricted under aggravated circumstances.
The Bank of Israel does not publish the identity of customers restricted under special circumstances on its website, but publishes only the details of accounts they hold that have been restricted as a result of the customers being declared restricted under special circumstances. These accounts are published on the website together with the date on which the restriction will end.
For information about special restrictions, please contact the entity that imposed the restriction.
Locating accounts and customers restricted under aggravated circumstances
To help citizens avoid receiving checks drawn on insufficient funds, the Bank of Israel posts on its website the numbers of restricted accounts and the dates on which the restriction will be lifted, noting the details of the bank and the branch where the account is kept. The Bank of Israel also publishes the names and ID numbers of customers who are restricted under aggravated circumstances, along with the dates on which the restriction will be lifted.
- The Bank of Israel does not post the identities of customers restricted under special circumstances (i.e., those restricted by the Enforcement and Collections Authority, a rabbinic court, the Official Receiver and the Center for Collection of Fines, Fees and Expenses). It posts only the details of bank accounts that are restricted due to the customers’ having been declared restricted under special circumstances. When these accounts are posted to the website, the dates on which the restriction will be lifted are also posted.
- The information on the Bank of Israel website does not include customers restricted under aggravated circumstances within the first sixty days of the restriction or information about customers who have appealed their restriction to the court.
Indirect implications of restriction of customer
Apart from the direct implications for a person who has been restricted, the very fact of being restricted has additional implications irrespective of the type of restriction:
- Although the law does not prohibit a bank from issuing credit cards to a restricted customer, banks that have issued credit cards to such customers are allowed to cancel them. The cancellation of a card usually takes place due to the customer’s financial situation, which apparently has caused the checks to be returned and the restriction to be imposed. Such cancellation falls within the purview of the bank’s business decisions.
- Debit cards: Pursuant to Proper Conduct of Banking Business directive 422, a bank is required to issue a debit card to any customer, including a restricted customer, for the immediate execution of payments. Under such cards, the account is debited at the time the transaction is made, without credit. In cases where the Enforcement and Collections Registrar has prevented a customer from using payment cards including debit cards, and in exceptional cases related to money laundering, such cards will not be issued to a customer.
- The bank may refuse to issue credit (regular loans, mortgages, lines of credit, and so forth) to restricted customers even after the restriction has been canceled. This refusal also falls within the purview of the bank’s business decisions, and the Bank of Israel has no authority to intervene.
- Information on restrictions is sent to the credit bureaus pursuant to the Credit Data Service Law, and may be made available to nonbank credit providers (who also may refuse to grant credit to restricted customers) and various merchants.
Information on banking restrictions is also sent to the Credit Data Sharing System based on the Credit Data Law. The information on the restriction is shown in the customer’s credit report during the restriction period and for three years following the period, and is considered significant negative information. In order to generate a personal credit report from the Credit Data Register, please contact the Register’s representatives through the Bank of Israel website or by calling *6194.
Information on restrictions also appears in the Banking ID that is sent to the customer (free of charge) once a year. (An additional Banking ID can be requested, at low cost, throughout the year.)
Serving of process in regard to bank-imposed restriction
When is a restriction warning sent?
When 5 checks have been returned in an account due to insufficient funds, the bank must send the account holder a warning. The warning should explain that if the bank returns ten or more checks drawn on the account within a twelve-month period, the account and its holder will be restricted. A flaw in the warning or non-receipt of the warning are not grounds for the cancellation of the restriction, provided the bank actually sent the warning. If the conditions for restriction apply on the date of the warning, the customer will not be sent a warning but rather a notice of restriction only. To remove doubt, in the case of a restriction under aggravated circumstances, no warning will be sent.
Who announces an ordinary restriction and a restriction under aggravated circumstances?
The banking corporation sends notice about the imposition of an ordinary restriction. The Supervisor of Banks (hereinafter: the Supervisor) sends notice about the imposition of restrictions under aggravated or special circumstances, except for notices regarding special restrictions imposed by the Enforcement and Collections Authority, which are sent directly by the Authority.
When is a notice of restriction sent out?
A bank shall send a notice of restriction no later than five business days after the day on which the last check that triggered the restriction was refused. The restriction begins fifteen days after the notice is sent.
A Supervisor’s notice of restriction under aggravated circumstances shall be sent within nine days from the date on which the Bank of Israel receives the bank’s report on the restriction that triggered the restriction under aggravated circumstances.
To whom are the warning and the notice of restriction sent?
In the event of a normal restriction, the warning and the notice of restriction are sent to every member of the account, anyone who holds power of attorney, and any authorized signatory.
In the event of a restriction under aggravated circumstances, notices are sent to all members of the account, powers of attorney, and authorized signatories in all accounts that are subject to the restriction.
Counting of checks for restriction of account
What is a “refused check”?
A refused check is one that has been presented for payment on or after the date recorded on it and is refused by the bank due to insufficient funds in the account.
Pursuant to Section 7a(a) of the Checks Without Cover Law, 5741–1981, the bank must send the account holders or authorized signatories in the account a notice regarding the need to deposit funds into the account no later than 8:00 am on the business day following the business day on which the check was presented for payment, and must allow funds to be deposited into the account up to two-and-a-half hours before the end of the business day, in order to prevent the refusal of the check on that day.
If an amount sufficient to cover the check is not deposited, the bank will return it due to insufficient funds, and will count it among the checks without cover in the account.
Is a check for which a cancellation order is given counted among checks without cover?
The bank where the drafter of the check keeps his or her account (the payer bank) must check whether the account has enough funds to cover the check even if the customer issued a cancellation order relating to it. This means that even a canceled check will be counted among checks without cover if the account did not have sufficient funds to cover it and the bank would not have honored it had the cancellation order not been issued.
In a case where the account lacks sufficient funds when the check is presented for payment and the drafter of the check cancels it (for example, if the drafter claims that he or she did not receive consideration for it)—the bank shall return the check and note two reasons for doing so: “Insufficient funds” and “Cancellation order received”.
Is a check that is returned for a reason other than a cancellation order counted among checks without cover?
Most of the reasons for returning checks that appear in the Clearinghouse Rules have nothing to do with sufficient funds in the account. Instead, they relate to “Account closed”; “Drafter’s signature faulty”; “Sums do not match”; “Not endorsed”, “Improper endorsement” etc.
These reasons do not absolve the payer bank from responsibility for determining whether the check can be covered. If upon enquiry it is found that the check cannot be covered and the bank decides not to honor it for the additional reason as well, the bank shall return the check due to insufficient funds and also record the additional reason. For example, if the account does not have sufficient funds on the day the check is presented for payment and the drafter’s signature does not resemble the specimen kept with the bank, the bank shall return the check for two reasons: “Insufficient funds” and “Drafter’s signature faulty”.
For what reasons would a check not be counted among checks without cover?
There are exceptional reasons for returning a check. When these reasons are in place, the check is not counted as a refused check even if there was an insufficient balance in the account at the time the check was presented for payment. In such cases there is no legal logic for defining it as having been refused and counting it among the uncovered checks because, in these cases, the drafter of the check either did not need to or could not have left in sufficient funds in the account to pay the check. Examples of such reasons include a check that turns out to have been stolen, a check deposited before the date of payment, and a check drawn on an account whose owner is deceased.
The full updated list of reasons for return appears in Section 206 of the Clearinghouse Rules.
When may a check be returned for the sole reason of “Check form canceled”?
When an account holder informs his or her bank, under his or her signature, that blank check forms have been lost or stolen, and a check written on such a blank form is presented for payment, it will not be counted among the refused checks in the account. Instead, it will be returned on the grounds of “Check form canceled.” In such a case, the bank will ask the customer to present, as evidence, proof that he or she filed a complaint with the police or obtained a decision from a court of law.
It is important to note that the bank has discretion in this case. As such, even in a case whe3re a customer provides a declaration and certification that he or she filed a complaint with the policy in respect of the theft or loss of a check, the bank is permitted—for cautionary reasons related to the customer’s conduct—to return the check for reason of “Cancellation order received”—a reason that requires sufficient cover.
How are checks in a joint account counted?
In a joint account, checks are counted for both members of the account even if only one of them signed the checks that were refused and returned due to insufficient funds. In an account that requires both members to sign each check and only one of them did so, the bank returns the check on grounds of “Drafter’s signature faulty” and also, if the balance in the account is insufficient, “Insufficient funds”, resulting in its being counted among the checks refused.
What happens if a check is presented for payment after the account is restricted?
- Checks presented after the onset of the restriction are returned on grounds of “Restricted account” and are not defined as checks that are refused.
- Note: Checks refused during the fifteen-day waiting period between the refusal of the last check—the event that triggered the restriction—and the beginning of the restriction are added to the count of checks that were refused and that caused the account to be restricted.
What happens when a lien is placed on an account?
When a bank returns a check solely because a lien has been placed on the account, and would have honored the check otherwise, it does so on the grounds of “Lien on the account”. In this case, the check is not counted among those that are returned for insufficient funds. This rule remains in effect for sixty days from the day on which the bank is advised of the lien.
However, if the balance in the account is not sufficient to cover the check for reasons unrelated to the lien, the bank shall return the check for two reasons: “Lien on the account” and “Insufficient funds".
What happens if a check is returned for insufficient funds more than once?
A check shall be counted in the number of checks refused only once, even if it is presented in the account a number of times and the bank returns it each time for reason of “Insufficient funds”.
Can a check that has been returned on the grounds of “Cancellation order received” be presented again?
According to the Clearinghouse Rules, a check returned on the grounds of “Cancellation order received” should not be presented again. Accordingly, a check return for this reason and presented for payment again shall be returned only on grounds of cancellation, even if the funds in the account were insufficient at the time it was presented again.
On the basis of what balance should a bank decide whether to return a check on grounds of "insufficient funds"?
The determining balance at the time of the bank’s decision on whether to return the check due to insufficient funds is the balance in the payer’s (drafter’s) account at the end of the business day on which the check is presented in the beneficiary’s account. In general, when the settlement is electronic, a picture of the check (“the computerized check”) arrives at the paying bank during the night, and is inspected by the bank on the day following its presentation in the beneficiary’s account. Similarly, in a case of manual settlement, the check arrives physically at the paying bank on the day following its presentation in the beneficiary’s account.
What makes a credit for depositing a check final, so that the sum of the check can be withdrawn from the account by means of a check or in some other way?
As a rule, crediting of a check that has been deposited in an account is considered provisional and does not become final until three business days after the day on which it is deposited. If the draftee bank (the paying bank) decides to return a check due to a cancellation order, insufficient funds, or any other reason—the beneficiary’s account is debited in the amount of the check and this sum not available to him or her. Accordingly, the bank normally does not include checks deposited in the account in the determining balance for the coverage of checks drawn on the account until three business days after the day on which the checks are deposited.
Recommendation: To make sure that the balance resulting from the depositing of checks can be used to cover payments from the account (such as checks drawn on the account), checks should be deposited at least four business days before the day on which the account is expected to be debited for these payments.
Cancellation of restriction
The procedure used to cancel a restriction is set in motion by an appeal to the Magistrate’s Court under Section 10 of the Checks Without Cover Law, 5741–1981. A customer who is restricted or restricted under aggravated circumstances may ask the Magistrate’s Court to revoke the inclusion of a check in the count of refused checks if one of the following conditions applies:
- The bank refused to honor the check due to an error.
- The bank refused to honor the check due to a lien on the account if both of the following two conditions apply: the check was drawn before the bank received notice of the lien and the check could not have been paid for sixty days from the date on which the bank received notice of the lien;
- The customer has reasonable grounds to assume that the bank should have honored the check—either because there were sufficient funds in the account or due to an agreement with the bank.
- The customer was unable to take care of his or her affairs due to injury (to his or her person or property) in a hostile action, and the check was refused for this reason.
- The customer lives in an area where a state of emergency was declared under Paragraphs (1) and (2) of the “Declaration of Emergency” provisions in Section 1 of the Checks Without Cover Law, and between the date on which the check was drawn and the day on which it was presented for payment the customer’s income was badly compromised due to the state of emergency, for which reason the check was refused.
An appeal under Section 10 of the Law centers on a claim by the appellant that a specific check or several checks should be excluded from the count of checks that were refused in his or her account and included for the purposes of the restriction, thereby leading to the restriction. The court is not asked to rule on the validity or invalidity of the restriction itself because Section 10 empowers the court only to remove checks from the count of checks that triggered the restriction.
Regarding restrictions under special circumstances, in order to remove the restriction, an appellant must contact the entity that imposed it (the court, the rabbinic court, or the Enforcement and Collections Authority).
Process for appealing the restriction of an account
The Checks Without Cover (Jurisprudence) Regulations, 5742–1981 set out the process as follows:
An appeal under Section 10 of the Checks Without Cover Law shall be submitted to the Magistrate’s Court in the jurisdiction in which the bank branch on which the check was drawn (hereinafter: the bank branch) is located.
The appeal must be submitted in writing, using the form set forth in the Regulations (hereinafter: the application).
The application shall include a detailed statement containing all the facts, claims, and rationales on which the application is based.
The respondent to the application is the bank on which the refused checks were drawn, and that bank shall note the address of the bank branch as its address.
Applicants shall attach the following to their application:
- A detailed statement that corroborates all the facts that form the basis of the request;
- A copy of any document or other evidence on which the request is based;
- A copy of a request from the applicant or from another member of the account to the respondent, seeking cancellation of the inclusion of the check being appealed in the count of checks refused, and the respondent’s reply.
- If the check being appealed was drawn on a joint account—a copy of the notice under Form 2 in the Addendum to the Checks Without Cover (Jurisprudence) Regulations, 5742–1981.
Deadline for submission of application
A restricted customer shall present the appeal application within 20 days from when the bank sent him the notice.
A customer who is restricted under aggravated circumstances shall present the appeal application within 20 days of having been advised by the bank of being a restricted customer or within 10 days of having been advised by the Supervisor of being a restricted customer under aggravated circumstances—whichever is later.
What are the implications of a court order for a stay of restriction?
If the court issues an order against the onset of the restriction, the following provisions shall apply:
- During the stay of restriction, the customer is not allowed to open a new checking account and the bank shall not open such an account for him or her.
- During the stay of restriction, the customer may perform transactions in the account and may even draw checks on it.
- Checks that are refused during the stay of restriction shall be counted among refused checks in a count that starts over on the day the stay of restriction order is handed down. If the statutory conditions for restriction apply, the account will be restricted once again, as required.
What happens if a bank restricts an account by mistake?
The law states that if a bank restricts an account by mistake, it must advise the Bank of Israel of this and the restriction will be lifted. If the bank admits that the restriction was done in error, there is no need to appeal to a court.
What happens if a third party mistakenly deposits a check that s/he was not supposed to deposit?
The law discusses only an error by the bank in imposing a restriction, not an error by an account holder or a third party.
Such errors may occur if an account owner cancels a check and pays the recipient of the check in some other way, reaching agreement with the recipient of the check that the latter will not deposit the check in his or her account, and despite this agreement, the third party presents the check for payment at a time when the payer’s account does not have sufficient funds. In this case, the check is counted among the refused checks in the account. The law does not allow the bank to recognize an error made by a third party, so the check cannot be held out of the count of refused checks in the account. The drafter of the check may bring claim against the third party only.
Termination of the account restriction and implications of the restriction for customer activity
After the restriction is over, does the customer’s situation vis-à-vis the bank revert to the status quo ante?
Once the restriction period is over, the customer may perform transactions in his or her account as he or she had done before the restriction. This means that there is no legal impediment to drawing checks or opening a checking account. However, it should be remembered that issuing checks and credit are not services that a bank must provide a customer; they are provided at the bank’s business discretion. The fact that the customer had been restricted may affect the bank’s decisions in these matters.
How long does the bank retain information about restriction of an account?
Banks that receive restriction information because the Bank of Israel is required to disseminate it among all banks may not retain or use this information after 3 years from the end of the restriction period. A bank that restricts a customer may retain the information with no time limit.
Cashing a check that was returned due to insufficient funds
Whom should I contact if I hold a check that was returned due to insufficient funds?
One who holds a check that was returned due to insufficient funds may ask the Enforcement and Collections Authority to execute a note (or check) and/or may bring a civil suit against the drafter of the check in order to bring about enforcement of collection of the debt.
What identifying particulars are given to the holder of an unpaid check?
The bank upon which the checks are drawn must provide the recipient of a check that has not been paid, for any reason whatsoever, with the following particulars:
- The name, ID number, and registered address of the account holder;
- The name, ID number, and registered address of a holder of power of attorney or an authorized signatory who actually signed the check, if the bank believes that it can identify the signatory.
Use of information pursuant to the Checks Without Cover Law
Proper Conduct of Banking Business directive 430—Use of Information Pursuant to the Checks Without Cover Law (hereinafter: the Directive) prohibits the banks from making commercial or business use (such as the customer’s credit rating) of information on restrictions of customers or private accounts, and permits the use of such information only for the purpose of fulfilling the aims of the Checks Without Cover Law, 5741–1981 (the Law). The Law relates to the following uses:
- Prohibition of opening a checking account during the restriction period (but a non-checking account may be opened during the restriction period in accordance with the provisions of Proper Conduct of Banking Business directive 422);
- Refusal of checks drawn on a restricted account for reason of “restricted account”;
- Warning to a partner interested in joining a restricted account or an account for which the restriction ended less than 3 months ago.
In this context, it is important to note three things:
- The banking corporations have the option of purchasing information from the credit data agencies regarding the financial history of private customers, including banking restrictions in respect of checks that were returned due to insufficient funds where the restrictions ended less than 3 months ago. The permitted information retention period in this case is set out in the Credit Data Law.
- Restrictions imposed by the bank itself in respect of transactions involving checks that were drawn on an account that the customer holds with the bank are business information that belongs to the bank. Therefore, Directive 430 does not prevent that bank from making use of the information on the stated restriction for its business purposes.
- Information on restrictions imposed by the Official Receiver is published to the general public, including the banking corporations.