With the increasing cost of living and the desperate need for cash to cope with the expenses of modern city life, scores of people are finding themselves embroiled in criminal cases after being made to sign blank cheques, or ‘security cheques’, by banks in the process of applying for a mortgage loan for car purchase, a credit card loan or any investment debt.

Hani Hammouda, legal counsel of Kefah Al Zaabi Firm for Advocacy and Legal Consultancy has highlighted the cases some of his clients have faced after signing blank cheques.

“When someone applies for a loan, the customer service employee at the bank would tell him to sign a cheque in which no specific amount is written. It is a blank cheque, that is a security cheque which is their way to secure the bank’s rights and guarantee that the customer will settle his dues to the bank,” Hammouda explains.

The customer would sign the blank cheque not having any idea about the amount the bank would decide to write in it at the point of default, and not aware that it may well have the same effect as a bounced cheque which could land him in legal trouble and in jail, he says.

Bank’s procedures against defaulter

“Let us say someone takes a Dh100,000 loan from the bank to buy a car,” Hammouda says. “The loan would be given to the applicant upon a contract signing with the bank.”

The agreement would be that the customer would settle the payment in five years by 48 cheques in addition to the security cheque, which is blank with no specific amount, signed by the customer.

At the first, second or mostly third default of payment, the bank would take legal action with the blank cheque and sometimes without serving notice to the loan defaulter.

The complaint will go from the Claim Section to the Legal Affairs Department at the bank. “The Legal Affairs Department may not have any idea how much of the whole payment was settled, be it 50 per cent or 60 per cent it makes no difference to them. Its representative will file a police report in which there would be no mention or consideration of the payment settled until the defaulting date.”

An expatriate, who took a Dh12,000 limit credit card on a bank, was made to sign a blank cheque. “He settled around Dh13,500 including the interests and returned the card to the bank. He was not then given back the security cheque he had signed. However, he was surprised later when he was called to the police station for a bounced cheque complaint filed against him. It was the security cheque,” Hammouda says.

“The expatriate did, in fact, have documents proving his claims of payment settlement. But he failed to attend the court hearing in which he was expected to submit those documents to the judge. Thus, he came out of the case with a fine of Dh2,000.”

It was a fault by the bank which should have closed the customer’s file and cancelled the blank cheque.

Basic legal principle of clarification

The legal principle of clarification is a conventional step that should be taken by a bank or any finance institution when someone applies for a loan.

“The principle of clarification should be respected by banks when making customers sign any contracts, cheques, or any other binding financial transactions,” Hammouda says. “In other terms, before getting caught in any financial obligation towards the bank or any other finance entity, the customer should be enlightened about the possible legal repercussions that he might face later because of signing of any document”.

“However, most times,” Hammouda says, “we see that the bank salesman (acts) oblivious about that principle aiming to boost his sales and process as many transactions as possible by not properly informing the customer about the whole picture of the matter. The customer would otherwise refrain from the whole deal had he known any better.”

A case of bounced cheque

Hammouda says in one case, an Iranian investor took a loan from the bank to finance his purchase of two residential units. The loan was worth between Dh2 and 3 million. He paid an advance installment of 10 per cent upon signing the contract and the bank took up the settlement of the remaining amount to the property developer.

The investor was jailed in connection with a separate bounced cheque case and when he was released he learnt that the bank took action against him, demanding him to settle two security cheques that he had signed, worth in total Dh 3.2million.

“The investor was sued by the bank for default of payment of the monthly instalments,” he says.

The units were never delivered to the businessman who had only booked them on paper. He told the bank that he was willing to relinquish his ownership rights as he had paid 10 per cent in addition to the Dh140,000 in fees he had paid for land registration. But the bank turned his request down and insisted he paid up the security cheques. The bank also did not approve the investor’s request to repay the loan in instalments.

He was convicted and given one year and three years in prison for both cases. He has filed an appeal.

In another case, an Arab expatriate, who has been living in Dubai for more than a decade now, described his experience with banks.

“I avoid as much as I can taking loans from banks. Unless you ask questions, none would tell you what it is all about. For me, banks’ only care is profits and no better way to make profits than to prey on naive people and others desperate for cash. They would lure them with big cash and project financing but would not at all bother to inform them on the legal risks that come along.”

Cancel blank cheques

Hammouda says it is always recommended not to sign any blank cheques.

“In cases of small amounts, the bank may rather file a report at the police station citing that his customer failed to pay. Then, the dispute can be resolved amicably at the police station and would not be classified as a bounced cheque case,” he suggests. The Judge or the prosecutor looking into the matter should take into consideration whether the customer settled a big part of the loan.

If the bank follows other procedures rather than invoking the security cheque against the customer a positive outcome would result for all parties, he says.

“The load of cases will be less heavy on the court. Besides, the bank and the customer will not be caught in the middle of lengthy legal proceedings. As long as the case can be resolved away from the courts it would be in all’s best interests.”

Hammouda suggests that in case of buying a car using a mortgage loan, the bank should make the customer sign a pledge that upon any default in settlement of installments the bank can take its car back and put it on sale in auction, similar to the action take in case of a default in other jurisdictions.

Don’t fall for tempting offers

One reader said the counter employees at two different banks were not very cooperative and were reluctant to give detailed information about loans.

“One employee confirmed when I asked him about a loan for a car purchase that I would have to sign the ‘blank security cheque’. The security cheque needs to be signed in addition to the other installment cheques before I could avail of the loan I want.” The reader added that the other banker told him to leave his number and they would call him later, but they never did.

The legal counsel says his best advice would be never to sign any binding contract or blank cheque unless you are fully aware of its stipulations and effects.