Posted March 20, 2024 by Raymond G. Leclair

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Article highlights:

1.For funds to be truly irrevocable, you need a PCRN. Anything else is a risk.
2.“On-Us” funds (e.g. when the payee and the payor are at different branches of the same financial institution) are safe and you can proceed.
3. Just because a bank releases your funds – even after a hold period – does not make it real money – you should try to get confirmation that the funds are irrevocable.

Payment Channels in Canada

I have previously written on the status of secure funds and the following article is an update as we continue to understand ongoing developments in the secure exchange of funds and how to minimize the risk to lawyers and their clients.

Current Status:

Payments Canada sets the rules for financial institutions to transfer funds. Presently there are two payment channels in Canada: Lynx and ACSS:

-Lynx (previously LVTS) is Canada’s high-value payment system. Wire payments cleared and settled using Lynx are fast¹, irrevocable and made with real-time settlement finality.

-ACSS stands for Automated Clearing Settlement System and is Canada’s retail batch payments system that clears the vast majority of payments in Canada. Financial institutions provide users with an immediate credit for the amount of the deposit, subject to it being later settled or taken back. Examples of ACSS paper-based and electronic payments:

Paper-Based

• Cheques
• Paper remittances*
• Government items (including government cheques, redeemed bonds, treasury bills, and coupons) *

Electronic

• Direct deposits
• Electronic data interchange (EDI)*
• Electronic remittances*
• Imaged paper items
• Point of service debits and credits*
• Online debits and credits
• Pre-authorized debits
• Shared ABM Networks*

(*Canadian dollar only)

In 2023, ACSS represented 99% of the transaction volume but only 8% of the monetary value, while Lynx was 1% of the transaction volume and 92% of the monetary value.

Bank Hold/Release of Funds

Financial institutions will have policies where they will place deposits on hold pending verification. The fact that they released such a hold or never implemented a hold is not equivalent to funds being settled. This is simply a limitation they put on the credit they are providing to you depending on your relationship with them. The settlement of funds where the credit is confirmed as an irrevocable deposit is a separate matter. A lawyer has recently reported a significant claim for a loss on this very fact situation.

Coming soon:

1. Payments Canada is planning a new channel called the Real-time-Rail (RTR) that will include a confirmation number similar to the PCRN, and

2.Payments Canada is planning to update the ACSS channel.

3. All three channels (Lynx, RTR, and ACSS) will be ISO 20022² compliant and provide good irrevocable funds. With ISO 20022 certification, lawyers will be able to transmit and receive much more information with the payment. Presently the limited data transmitted does not allow one to identify good irrevocable payments.

What to do in the meantime:

Until all three channels are modernized, lawyers are left to wonder if a deposit entry into our accounts is an actual dollars or merely a credit that may later be taken back by the financial institution, unless we get the PCRN.

PCRN Question and Answer

When Payments Canada was asked “if the descriptor that defines the funds in your account shows they arrived by wire transfer or EDI, are those funds final and irrevocable by operation of Canadian law solely by being a wire transfer or EDI mode of funds delivery? No further investigation or effort on the receiver’s part is necessary?”

Payments Canada’s Response:
“Although “descriptor” isn’t a term generally used in Payments Canada’s by-laws and rules, from the context we assume that the lawyer writing to you is referring to some sort of notation associated with a credit to an account (e.g. in an account statement or online banking platform).

…The Lynx By-law addresses the finality and irrevocability of payments made via Lynx and the significance of the Payment Confirmation Reference Number (PCRN) (see sections 32(2), 36, and in particular 37 and 39). However, neither the Lynx By-law nor the Lynx Rules speak to how a receiving Lynx participant (or other member) identifies a payment to their customer as a Lynx payment for the purposes of account statements or other communications. Sections 36 and 37 of the Lynx By-law refer specifically to the PCRN, which may differ from the descriptors provided by each financial institution.

Electronic Data Interchange (EDI) payments differ from Lynx payments as they are made through the ACSS, and governed by the ACSS By-law and Rules. Notably, the relationship between the receiving bank and the end user is likely governed by their contract. Accordingly, EDI payments are final and irrevocable as between participants after meeting the requirements in the ACSS Rules, such as Rule E3, but the ACSS By-law and Rules do not specifically address finality and irrevocability of a payment credited to an end user’s account.”

Therefore, the only way we can presently identify irrevocable payments is by obtaining the PCRN. Without it, the receiver gets instantaneous credit which may or may not be settled eventually or withdrawn from the receiver’s account.

Where to find the PCRN?

Once a wire has been approved and sent from your financial institution’s software, re-enter the software and drill down in the data provided with the payment to find the PCRN.

The PCRN is a number that begins with the four letters – “LVTS” followed by 9 digits. The PCRN is only created by the Lynx channel once the wire request is processed. With the PCRN you can be assured that the money is transferred via the Lynx channel and is good and irrevocable funds (s.33, Bylaw 9). Lawyers who bank at Canada’s major financial institutions have confirmed that they can retrieve the PCRN after they have sent the funds and include it in their receipt sent to the receiver.

If you are receiving a wire, you should contact your financial institution to request the PCRN. Under Payments Canada Bylaw 9, s.39, a financial institution is required to provide the PCRN on request. We have asked the Canadian Bankers Association and Payments Canada to work with us to create a protocol for financial institutions to automatically note the PCRN on the online portal or paper statements lawyers receive. Payments Canada has agreed to educate its members on the obligations under Bylaw 9 as a first initiative. We encourage all lawyers to contact their financial institutions to request the PCRN and to push them to automatically provide the PCRN on their online portal or paper statements.

We encourage any lawyer sending funds to another by wire to include in the wire receipt the PCRN to confirm to the receiver that they have been sent good and irrevocable funds, which they can then immediately use in service to their clients.

Other protection

Endorsement No.7 – Limited Trust Account Overdraft Liability Coverage

The LAWPRO policy Endorsement No.7 provides lawyers with some protection against fraudulent counterfeit certified cheques or counterfeit bank drafts that results in an overdraft in the lawyer’s trust account, provided certain conditions are met.

The conditions include:

• The lawyer must be holding funds in trust for a client connected to the provision of providing Professional Services as a Lawyer
• Limited to Canadian financial institutions paper instruments;
• A sublimit of $500,000 per insured; and
• The Counterfeit Certified Cheque or Counterfeit Bank Draft must have been inspected and deposited by the applicable Lawyer, his or her partner, or an employee of the firm; or
• The Lawyer must wait 8 business days from the date of deposit into the trust account of the Counterfeit Certified Cheque or Counterfeit Bank Draft before issuing cheques, drafts or other payment instructions related to such deposit;
• The 8 business day rule will be waived if the Lawyer received confirmation from either her financial institution or the issuing financial institution that confirms that the issuing financial institution has verified the validity of the Counterfeit Certified Cheque or Counterfeit Bank Draft; and that confirmation of this is documented in writing to the Lawyer by either the Lawyer’s financial institution or the issuing financial institution, or by the Lawyer, herself, confirming that she has received confirmation from one of the financial institutions as to the above condition.

Ex. If a fraudster provides a Lawyer with a $500,000 counterfeit certified cheque, which the innocent Lawyer deposits into their trust account, and then issues a certified cheque from the trust account for $500,000 to complete a transaction (such as a purchase of a property). If the Lawyer had $300,000 in their mixed trust account which they were holding for other clients’ matters. When the counterfeit certified cheque is identified by their financial institution, the $500,000 credit for it is withdrawn from their account and suddenly the balance showing for their account is -$200,000 (because they issued a cheque for $500,000, but only had $300,000 in the trust account to begin with). To the extent that $300,000 of client funds have gone missing, LAWPRO would be expected to respond in the normal course to that loss. As for the remaining balance of $200,000 owing, in the normal course, this would be a private debt between the Lawyer and the Bank arising from a third-party crime. However, Endorsement No. 7 was introduced by LAWPRO to provide some relief for this type of Overdraft exposure subject to the terms and conditions of the policy referenced above.

ON-US Payments

On-us refers to transactions drawing upon direct deposit accounts (e.g., bank chequing accounts or business accounts) where both the payor and payee reside at the same financial institution, commonly known as branch-to-branch, same institution direct deposits. These are treated by financial institutions as if they were Lynx payments. Being good irrevocable funds, they may be dealt with immediately.

On-us payments are not processed through Lynx and Lynx By-law and Lynx Rule 10 do not apply. However, certain financial institutions have endorsed and agreed to adopt the practices as contemplated in Lynx Rule 10 and the Lynx By-law to ensure clarity of on-us payments and meet customer expectations. The list of these endorsing financial institutions can be found here, as well as further information on on-us payments.

These are direct deposits and are not within the scope of payments covered by Endorsement No. 7, however, as the financial institutions under their protocol treat them as Lynx transfers, they are good and irrevocable funds.

We hope that this update assists you in your practice in dealing with transferring funds on your clients’ behalf. The payments landscape continues to evolve. LAWPRO will continue to monitor and will provide updates to the profession.

¹Payments Canada description, although many users experience various delivery results.

²ISO 2022 is an international data-rich protocol to increase the amount of data that is transferred with a payment. Presently, the data is limited, think the size of a tweet, as opposed to with ISO 20022 up to 9,000 characters with standards that are internationally recognized. This will increase the efficiency of payment transfers between institutions. It is said that by 2025 ISO 20022 will be the universal standard for high, or large-value payments systems of all reserve currencies.