Posted on 01/07/2013 at 08:30 AM by John Lande
A federal court makes it harder for banks to avoid liability for fraudulent wire transfers
Under Article 12 of the Uniform Commercial Code (UCC) a bank bears the risk of loss for any unauthorized wire transfer. However, it is possible for a bank to shift that risk to the customer if (1) the authorized customer initiates the wire transfer, or (2) the bank and customer agree to a security procedure to verify the authenticity of any wire transfer. A security procedure is defined by the UCC to be some form of verification other than a comparison of the signature on a payment order to the signature on file. In Chavez v. Mercantil Commercebank, N.A. the United States Court of Appeals for the Eleventh Circuit addressed a case involving an allegedly fraudulent transfer of over $300,000. The case arose after the plaintiff opened an account with the defendant bank. As part of the account agreement, the plaintiff had to select the security procedures the bank would use to verify any request for a wire transfer. The agreement provided three options, and allowed the plaintiff to select up to two of the options. The plaintiff only selected one, which required the bank to verify the plaintiffs signature on any wire transfer request. One of the other options, which the plaintiff did not select, provided that the bank would use other methods to verify a wire transfer request. Shortly after the plaintiff opened the account he flew back to his home countryVenezuela. While the plaintiff was in Venezuela, another individual arrived at the bank with a request for a wire transfer from the plaintiffs account. The bank verified the signature, looked at a photo ID, and had two bank managers verify the request. The bank transferred $329,000 from the plaintiffs account to the Dominican Republic. The Eleventh Circuit briefly reviewed the UCC law governing wire transfers. The court then concluded that the banks security procedures failed to satisfy the UCCs requirements because the only procedure both the bank and the plaintiff agreed to involved verification of a signature. This was not a sufficient procedure under the UCC and thus the bank could not shift the risk of loss to the customer. The bank tried to argue that the agreement provided that the bank could take other precautions. The court, however, pointed out that though the agreement permitted the bank to take additional security precautions, the bank was not required to do so. As a result, the bank may end up being liable for the full $329,000 that was fraudulently transferred from the plaintiffs account. This case is a reminder that banks need to take a close look at funds transfer agreements. Banks need to make sure that they have in place adequate security procedures that comply with the UCCs requirements. If the bank does not comply with the UCC, then it could be held responsible for fraudulent transfers from customer accounts.