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Managing. The risk of Payment System - Turner P.

Turner P. Managing. The risk of Payment System - John Wiley & Sons, 2003. - 253 p.
ISBN 0-471-32848-0
Download (direct link): managingtherisksofpayment2003.pdf
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General Rule for Beneficiary Misdescription. The general rule for beneficiary misdescription imposes liability on the customer. The beneficiary’s bank is allowed to rely on the number and ignore the name. Section 4A-207 provides that if a payment order received by the beneficiary’s bank “identifies the beneficiary both by name and by an identifying or bank account number and the name and number identify different persons,” the beneficiary’s bank “may rely on the number as the proper identification of the beneficiary of the order.”54 Moreover, the bank has no
duty to determine whether the name and number refer to the
55
same person.55
The reason for the rule is that banks normally process payment orders by automated means that identify the beneficiary by number and are not capable of identifying the beneficiary by name. The Article 4A drafters, consistent with their goal of maintaining the high-speed, low-cost features of funds transfers, wanted to facilitate the continued use of automated means. The Official Comments explain the rule:
A very large percentage of payment orders issued to the beneficiary’s bank by another bank are processed by automated means using machines capable of reading orders on standard formats that identify the beneficiary by an identifying number or the number of a bank account. The processing of the order by the beneficiary’s bank and
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Wire Transfers
the crediting of the beneficiary’s account are done by use of the identifying or bank account number without human reading of the payment order itself. The process is comparable to that used in automated payment of checks. The standard format, however, may also allow the inclusion of the name of the beneficiary and other information which can be useful to the beneficiary’s bank and the beneficiary but which plays no part in the process of payment. If the beneficiary’s bank has both the account number and name of the beneficiary supplied by the originator of the funds transfer, it is possible for the beneficiary’s bank to determine whether the name and number refer to the same person, but if a duty to make that determination is imposed on the beneficiary’s bank the benefits of automated payment are lost. Manual handling of payment orders is both expensive and subject to human error. If payment orders can be handled on an automated basis there are substantial economies of operation and the possibility of clerical error is reduced.56
Exceptions to the General Rule. There are two exceptions to the general rule:
1. The customer’s bank is liable for the loss when it has not notified the originating customer that the beneficiary’s bank might pay on the basis of the number (unless the originator is also a bank), and
2. The beneficiary’s bank is liable for the loss when the bank knows that the name and number refer to different persons.
Customer’s Bank Liable for Failure to Give Notice. Liability for a loss resulting from a customer’s misdescription error shifts from the customer to the customer’s bank when the customer’s bank has failed to give the customer notice that the beneficiary’s bank may rely on the number. To avoid the loss, the bank must prove that the customer:
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Rules for Errors
had notice that payment of a payment order issued by the originator might be made by the beneficiary’s bank on the basis of an identifying or bank account number even if it identifies a person different from the named beneficiary.57
The notice need not be given, however, when the originator is also a bank. The purpose of the rule shifting liability to the customer’s bank is to protect customers who may not be aware that the beneficiary’s bank might process the payment order on the basis of the number. Banks, however, are thought not to need such protection.
[Section 4A-207(c)] is designed to protect the originator . . . . Under that [section], the originator is responsible for the inconsistent description of the beneficiary if it had notice that the order might be paid by the beneficiary’s bank on the basis of the number. If the originator is a bank, the originator always has that responsibility. The rationale is that any bank should know how payment orders are processed and paid. If the originator is not a bank, the originator’s bank must prove that its customer, the originator, had notice.58
The notice may be included in a Funds Transfer Services Agreement or provided to the customer in a separate document or even, it appears, provided orally:
Notice can be proved by any admissible evidence, but the bank can always provide notice by providing the customer with a written statement of the required information and obtaining the customer’s signature to the statement. The statement will then apply to any payment order accepted by the bank thereafter. The information need not be supplied more than once.59
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Wire Transfers
The most effective way to prove that the notice has been given is to produce the notice signed by the customer, and the most efficient way to obtain the customer’s signature on the notice is to insert it into the Funds Transfer Services Agreement. Good banking practice thus dictates that every customer sign an Agreement and every Agreement contain the notice. The notice should state that the beneficiary’s bank might make payment on the basis of the number “even if it identifies a person different from the named beneficiary.”60
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