Overview
Background
Policy
Seed Agencies& Their Banking Institutions

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On October 28, 2004, the Check Clearing for the 21st Century Act (Check 21) became effective. This Federal legislation (S 1334; HR 1474) had been passed the previous year and signed into law by President George W. Bush on October 28, 2003. The primary purpose of Check 21 is to allow an institution to make a unilateral decision to truncate all paper checks without agreements with any other party. Check 21 enables this by authorizing the creation of a substitute check from an electronic record (image) of the check for those banks and customers who have not agreed to accept the electronic record (image).

The State of New Jersey, by virtue of P.L.1994, C.140 (www.njarchives.org/links/pdf/pl1994-c140.pdf), allows the replacement of public records with digital images, so long as that the images are produced by an Image Processing System that has been reviewed by The Division of Archives & Records Management (DARM) and certified by the State Records Committee (SRC). The certification is granted to the agency, not hardware, software or vendors, even if the vendor is conducting the actual imaging of the records. At its core, the certification is a variance that is granted to the agency's records retention schedule.

In the pre-Check 21 world, a bank that imaged and shredded a New Jersey governmental agency’s checks (state or local) would have been in violation of P.L.1994, C.140 and P.L.1953, C.410 (the Destruction of Public Records Act). In the post-Check21 world an institution is enabled to image and shred the original check and produce a “substitute check” from the image upon request. However, the bank must warrant that the substitute check accurately represents the information from the front and back of the original check. Further, Check 21 does not address nor endorse imaging standards, outside of the nebulous “industry standards”, reducing the publication of a substitute check to an exercise in risk management.

One of the key benefits for an agency (and its banking institution) in pursuing certification for the agency under P.L.1994, C.140 is that it legitimizes the image and does away with the need for a substitute check: “Any public agency…may copy, record, index or transcribe public records by means of…image processing…subject to compliance with the rules and regulations promulgated therefor [sic] by the Division of Archives and Records Management [and] shall be considered a legal substitute for an original document.”

This policy further addresses the backgrounds of Check 21 and the certification of public records image processing systems in New Jersey, and establishes a streamlined process for agencies to obtain certification for the bank imaging of cancelled checks

Check 21
New Jersey Public Records Image Processing System Certification
Benefits

CHECK 21

OVERVIEW: With the enactment of the Check Clearing for the 21st Century Act (Check 21), all checks are eligible for conversion to a substitute check, including, but is not limited to, consumer checks, commercial checks, money orders, travelers’ checks, and treasury checks. Under Check 21 no institution or any its customers may “opt out” of the Act; they all must accept the substitute check in lieu of the original paper check. This encompasses all depository financial institutions (DFI) as defined by the Federal Reserve Act and includes every customer of a DFI, including, but not limited to consumer customers, corporate customers and governmental agencies.

Many states and other municipalities pay their obligations with warrants. These documents are considered non-negotiable instruments. Even so those state warrants that come within the definition of “check” may be converted into a substitute check under Check 21. Since warrants vary from state to state, banks processing such warrants should consult with their legal counsel as appropriate to determine coverage of warrants under Check 21.

The Act notes in Section 4 (General Provisions Governing Substitute Checks):

(A) NO AGREEMENT REQUIRED - A person may deposit, present, or send for collection or return a substitute check without an agreement with the recipient, so long as a bank has made the warranties in section 5 with respect to such substitute check.

(B) LEGAL EQUIVALENCE - A substitute check shall be the legal equivalent of the original check for all purposes, including any provision of any Federal or State law, and for all persons if the substitute check:

(1) accurately represents all of the information on the front and back of the original check as of the time the original check was truncated; and
(2) bears the legend: ‘‘This is a legal copy of your check. You can use it the same way you would use the original check.’’.

(C) APPLICABLE LAW - A substitute check that is the legal equivalent of the original check under subsection (b) shall be subject to any provision, including any provision relating to the protection of customers, of part 229 of title 12 of the Code of Federal Regulations, the Uniform Commercial Code, and any other applicable Federal or State law as if such substitute check were the original check, to the extent such provision of law is not inconsistent with this Act.

SUBSTITUTE CHECKS: A substitute check (a.k.a. Image Replacement Document (IRD)) is a paper reproduction of an electronic record (image) of an original paper check that was previously truncated that adheres to Draft Standard for Trial Use X9.90 (drafted by Accredited Standards Committee X9). Once approved, necessary steps will be taken for DSTU X9.90 to become an American National Standard with the number designation ANS 100-104. This standard calls for the IRD to:

• Contains an image of the front and back of the original check
• Bears a MICR line containing all the information appearing on the MICR line of the original check, except as provided under applicable industry standards
• Conforms, in paper stock, dimension and otherwise, with generally applicable industry standards for substitute checks, and
• Is suitable for automated processing in the same manner as the original

IRDs are designed to minimize the impact of check imaging on institutions and their customers that wish to continue to receive paper checks for processing and for their customers’ statements. However it may be more cost effective to ship the original check.

IRD Example (Front):
IRD Example (Back):
- Courtesy of the Federal Reserve Bank

RELATIONSHIP BETWEEN CHECK IMAGES AND CHECK 21: Check 21 authorizes the creation of the IRD from images of the front and back of the original paper check. Check 21complements image technology by enabling banks to unilaterally determine to truncate all paper checks and provide IRDs to those banks and customers who have not agreed to accept the electronic records (images) of original paper checks.

Check 21 provides legal recognition and equivalency for substitute checks only. Additional agreements and/or rules are required for image exchanges. Check 21 does not govern image exchanges, and therefore image exchanges still need to be performed under agreement between the parties.

WARRANTIES AND INDEMNIFICATIONS PROVIDED FOR IN CHECK 21: Under Check 21, the bank that creates the IRD, called the Reconverting Bank, and any bank that subsequently transfers, presents, or returns a substitute check for consideration provides the warranties prescribed in the Act, and an indemnity. The two warranties in the Act are:

1. that the substitute check meets all requirements for legal equivalence (that is, the substitute check accurately represents the information from the front and back of the original check and includes the required legend identifying it as a legal copy of the original check), and
2. that no bank will be asked to make payment on an item that it has already paid (no double debit). The warranties travel with the substitute check and any subsequent image of a substitute check, and apply regardless of whether a subsequent party receives the substitute check or an image of the substitute check.

The indemnity is provided to all parties in the collection or return stream for a loss that occurred due to the receipt of an IRD that would not have occurred with the original check. The indemnity also runs with the IRD, but unlike the warranties the indemnity only applies to a person that has received the substitute check.

Any bank that provides an IRD is potentially liable to an indemnified party for consequential damages when there is a breach of warranty.

DESTRUCTION OF THE ORIGINAL PAPER CHECK: Check 21 puts no destruction requirements on the truncating bank. A bank truncating the original paper check should evaluate its business considerations including but not limited to risk, cost, etc. in determining how long, if any, the original paper check should be retained. In an image exchange where agreements are required, the agreement may provide for check retention requirements that a bank must fulfill. Considerations for these agreements could include various federal and state laws that may specify retention requirements.

NEW JERSEY PUBLIC RECORDS IMAGE PROCESSING SYSTEM CERTIFICATION

The State of New Jersey, by virtue of P.L.1994, C.140, allows the replacement of public records with digital images, as long as the images are produced by an Image Processing System that has been reviewed by The Division of Archives & Records Management (DARM) and certified by the State Records Committee (SRC). The certification is granted to the agency, not hardware, software or vendors, even if the vendor is conducting the actual imaging of the records. At its core, the certification is a variance that is granted to the agency's records retention schedule. The certification establishes the legitimacy of the digital image:

• In the event of any such destruction or other disposition of any public records under the provisions of this section, the…image processed document or a certified copy of said…image processed document shall be receivable in evidence in any court or proceeding and shall have the same force and effect as though the original public record had been there produced and proved.”
• “Any public agency…may copy, record, index or transcribe public records by means of…image processing…subject to compliance with the rules and regulations promulgated therefor [sic] by the Division of Archives and Records Management [and] shall be considered a legal substitute for an original document.”

STANDARDS: P.L.1994, C.140 charged DARM with developing standards by which Image Processing Systems could be reviewed and approved for certification. These standards have been set forth in the New Jersey Administrative Code (NJAC). The NJAC that pertains to Public Records is found in Title 15 (Department of State) Chapter 3 (Records Management). The specific Subchapters that deal with Image Processing Systems are:

• Subchapter 4: Image Processing of Public Records
• Subchapter 5: Certification of Image Processing Systems

Image Processing System Minimum Requirements: An Imaging Processing System must meet the following minimum key requirements:

• Documented Policies and Procedures
• Open Architecture: customizable at the API level to allow import and export of image and indexes
• File Format: images must be scanned in TIFF format (Group III and IV compression is allowable)
• Resolution:

  • Small format: correspondence, forms, deeds, cancelled checks, etc. – 200dpi
  • Large format: Architectural/engineering drawings, maps, etc. – minimum of 300dpi
• Quality Control: Every image must be inspected (a higher level supervisory quality control may also be conducted on a sampling basis)
• Data migration plan
• Appropriate disaster prevention and recovery policies and procedures.

Backup Requirements: When an agency has a certified image processing system it allows them greater and easier access to their public records and allows them to dispose of the original paper documents under certain conditions:

• Short Term Records (<10 years retention): with adequate electronic/digital backup;
• Long Term Records (≥10 year retention, but not permanent): with adequate electronic/digital backup and archival quality microfilm;
• Permanent Records: Most permanent records may not be disposed of under any conditions; consultation with DARM would be required.

Cancelled checks have a six (6) or seven (7) year retention depending upon whether an agency is local or state, respectively. As such these are short term records and only require adequate or appropriate electronic/digital backup. Caveat: with a certified image processing system an agency should still make a request for the disposal of the cancelled checks; although this request should be conducted in the same manner as in dealing with traditional records (processed by DARM personnel with the approval of the State Records Committee) it can be annualized.

BENEFIT OF IMAGE PROCESSING SYSTEM CERTIFICATION

AS PREVIOUSLY NOTED, One of the significant benefits for an agency (and its banking institution) in pursuing certification for the agency under P.L.1994, C.140, is that it legitimizes the image and either does away with the need for a substitute check or legitimizes the path from which the substitute check is derived.

A recently adopted revision of the New Jersey Administrative Code (N.J.A.C.) governing the Division of Archives and Records Management’s (DARM) relationship with the State Records Committee (SRC), allows DARM flexibility in streamlining the process for the certification of bank image processing for New Jersey governmental agencies. The revision states:

N.J.A.C. 15:3-2.1(b)6. No official vote or action shall be required for administrative actions of the staff of the Division of Archives and Records Management previously authorized by the committee, including but not limited to approval of…annual renewal of certification of image processing systems for public records or other administrative actions regarding certifications of such imaging systems [emphasis added]. Notification of such administrative actions by the division shall be declared and recorded at the subsequent meeting of the committee.

This revision coupled with the fact that a copy of a cancelled check is required to be maintained by a banking institution, creates a synergy for streamlining the certification process so that both New Jersey’s governmental agencies or authorities and the banking industry can reap the benefits of a certified New Jersey Public Records Image Processing System.

A banking institution must initially work with a “seed” New Jersey governmental agency or authority to complete a full-blown certification for said agency. Keep in mind that the certification is for the agency not the bank as the SRC only certifies New Jersey governmental agencies or authorities. This seed certification will include:

• Completion of banking institution form
• Completion of agency form
• DARM review of Documentation
• Site visit to banking institution (may include site visit to destruction facility)
• Recommendation of:
  • Bureau Chief, Records Management
  • Supervisor, Public Records Image Processing System Certification
  • Supervisor, Micrographics and Alternative records Storage
• Appearance before and review by the SRC (including public notice by seed-agency seeking certification.
• Award of Certificate

Once a banking institution has successfully assisted a seed-agency through the certification process, additional agencies may reap the benefits of that certification by pointing to the documentation of said certification. A “reaping-agency” will attain certification by:

• Completion of agency form
• DARM review of Documentation
• Approval by Supervisor, Public Records Image Processing System Certification
• Presentation of application and approval at next regularly scheduled SRC meeting during Administrative Actions: Image Processing System Renewals/Administrative Amendments
• Award of Certificate

THIS POLICY STREAMLINES THE PROCESS FOR NEW JERSEY’S GOVERNMENT AGENICIES AND AUTHORITIES (and their banking institution) TO REAP THE benefits of legitimizing the cancelled check’s conversion to a digital image, establishing it as the legal public record, and it either does away with the need for a substitute check or legitimizes the path from which the substitute check is derived.

Application Forms for "Check 21 Bank & 'Seed' Agencies" and for "Reaping Agencies" are available from NJDARM's Forms Webpage.