What it means
A cheque made payable to a named person can be transferred to someone else by endorsement: the payee signs the back and the cheque becomes payable to the new holder. There are three main kinds.
A special endorsement names the new payee ("pay to the order of ABC Ltd, signed J Smith"), so only ABC can present it. A restrictive endorsement limits what can be done with the cheque ("for deposit only to account 12345, signed J Smith"), which is what banks and businesses use to protect cheques between receipt and deposit.
A blank endorsement is just the signature, with no payee and no restriction, and it makes the cheque payable to bearer. The blank endorsement exists for convenience.
A payee who wants to pass a cheque on, or cash it, signs and hands it over. Historically it allowed cheques to circulate as a form of payment.
Its danger is that possession becomes ownership: a blank-endorsed cheque in the wrong hands is as good as cash to a thief, and the original payee's recourse is limited. For that reason, banks advise customers never to endorse a cheque in blank until they are at the counter, and businesses build the restrictive endorsement into their cheque handling procedures, often with a stamp applied by whoever opens the post.
The concept applies to other negotiable instruments as well: promissory notes, bills of exchange and, historically, bearer bonds and share certificates with transfer forms signed in blank. In each case a blank endorsement or signature transfers title to the holder and removes the protection of a named transferee.
Company secretaries and lawyers are careful about signed-in-blank transfer forms for the same reason. As cheques decline, blank endorsements matter less in practice, but the principle survives in every context where a signature converts a controlled instrument into a bearer one, and in the internal controls that prevent it.
In practice
Real-world examples.
Example
A customer receives a refund cheque, signs the back and hands it to a friend to cash on her behalf; the friend can now cash it, and so could anyone who found it.
Example
A charity's treasurer stamps every donation cheque "for deposit only" before it leaves the opening desk, so that cheques in transit to the bank cannot be diverted.
Example
A shareholder sends a share transfer form signed in blank with the share certificate to a broker for safekeeping, and the broker's compliance officer refuses to hold it because the shares could be transferred to anyone.
Think of it
“A blank endorsement is just signing the back-making a check cashable by whoever has it.
Case study
Seen in the real world.
A property management company collected rent from 300 tenants, many of whom paid by cheque. A junior administrator with access to the incoming post noticed that cheques were routinely endorsed in blank by a manager on Fridays and left in an unlocked drawer until Monday's banking. Over eight months she removed cheques totalling $46,000 from the drawer after they had been endorsed, deposited them into an account she had opened in a name similar to the company's, and covered the missing rents by posting the tenants' accounts as paid from other receipts.
The shortfall surfaced only when the bank reconciliation, which had been forced to balance with an unexplained adjustment for months, was reviewed by a new accountant. The company recovered a fraction from its insurer.
Its new procedure required restrictive endorsement at the moment of opening the post, a receipts log independent of the accounting system, daily banking, and a bank reconciliation reviewed monthly by a director. The blank endorsement had turned each rent cheque into cash for whoever picked it up.
Watch out
Common mistakes.
- Endorsing cheques in blank before reaching the bank. Anyone who obtains the cheque can cash it.
- Holding blank-endorsed instruments or signed-in-blank transfer forms as a convenience. They are bearer instruments in all but name.
- Relying on the bank to notice a diverted cheque. A properly endorsed cheque presented by the holder will usually be paid.
Questions
People also ask.
What is the difference between a blank endorsement and a special endorsement?
A blank endorsement is a bare signature that makes the cheque payable to bearer. A special endorsement names the new payee, so only that person can present it.
What is a restrictive endorsement?
An endorsement that limits what can be done with the instrument, most commonly "for deposit only" to a named account. It is the standard protection for cheques received by a business.
Can a blank endorsement be undone?
The holder can add a special or restrictive endorsement above the blank signature, converting it back to an order instrument. Until then, the cheque is payable to whoever holds it.
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