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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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Beneficiary’s Bank Liable When Aware of Discrepancy. Under the general rule, the beneficiary’s bank, in processing a payment order in which the beneficiary is misdescribed, may rely on the number and ignore the name. If the bank processes the payment order on the basis of the name and a loss results from the misdescription, the beneficiary’s bank is liable for the loss.61
Moreover, the general rule applies only when the “beneficiary’s bank does not know that the name and number refer to different persons.”62 Thus, the beneficiary’s bank is liable for losses when it has “knowledge” that the name and number refer to different persons.
How might such knowledge be acquired by the beneficiary’s bank? Under the general rules and definitions of the Uniform Commercial Code, a party in a transaction is regarded as having “knowledge” of a fact when it is brought to the attention of the individual conducting the transaction or when the fact would have been brought to the attention of that individual if the party had exercised “due diligence.”63
On this basis, the beneficiary’s bank would have “knowledge” that the name and number refer to different persons when that fact is brought to the attention of the individual conducting the transaction in the bank’s wire room or when that fact should have been brought to the attention of that individual if the beneficiary’s bank had exercised due diligence. In normal circumstances the bank can be expected to exercise due diligence, and thus the “knowledge” exception to the general rule that the ben-
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Rules for Errors
eficiary’s bank may rely on the number and ignore the name, would normally present no problem to the bank. The bank would typically not have knowledge of the name and number discrepancy, and when it had actual knowledge it would not accept the payment order.
The capability of modern computers, however, poses uncertainty in the rules. Suppose that the bank’s software is capable of alerting the wire room personnel to the existence of a name in the payment order. Does due diligence require the wire room personnel to check the name against the account number to be certain that the name and number match? Perhaps not. Article 4A makes clear that the beneficiary’s bank “need not determine whether the name and number refer to the same person.”64
Fraudulently Induced Misdescription. The foregoing rules may apply to relieve the beneficiary’s bank of liability when it has relied on the number in processing a misdescribed payment if the misdescription has been fraudulently induced. The Official Comments give an example of a thief fraudulently inducing an originator to issue a payment order in which the name and number refer to different persons:
Doe is the holder of shares in Mutual Fund. Thief, impersonating Doe, requests redemption of the shares and directs Mutual Fund to wire the redemption proceeds to Doe’s account #12345 in Beneficiary’s Bank. Mutual Funds originates a funds transfer by issuing a payment order to Originator’s Bank to make a payment to Doe’s account #12345 in Beneficiary’s Bank. Originator’s Bank executes the order by issuing a conforming order to Beneficiary’s Bank, which makes payment to account #12345. That account is the account of Roe rather than Doe.65
In the foregoing example, Thief has fraudulently induced Mutual Fund to issue a payment order in which the beneficiary is misdescribed. The name of the beneficiary, Doe, is correct, but
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Wire Transfers
the number of the account, #12345, refers to the account of Roe, not Doe. The rules described above would apply. Beneficiary’s Bank would be entitled to rely on the number, and Mutual Fund would be required to reimburse Originator’s Bank for the funds transfer, unless one of the exceptions described earlier applies.
In the example, Roe may be Thief, a confederate of Thief, or an innocent third party. The Official Comments illustrate how Roe might be an innocent third party:
Assume that Roe is a gem merchant that agreed to sell gems to Thief who agreed to wire the purchase price to Roe’s account at Beneficiary’s Bank. Roe believed that a credit to Roe’s account was a transfer of funds from Thief and released the gems to Thief in good faith in reliance on the payment.66
Whether Roe is the thief, a confederate, or an innocent third party, the beneficiary’s bank would be entitled to rely on the number under the general rule. Thus, Mutual Fund would be obligated to pay its bank unless the exceptions to the general rule applied, that is, unless the bank had failed to give notice to Mutual Fund that the beneficiary’s bank might rely on the number (in which case Mutual Fund’s bank is liable for the loss) or the beneficiary’s bank accepted the order with knowledge that the name and number were discrepant (in which case the beneficiary’s bank is liable for the loss). Mutual Fund would be entitled to pursue the wrongdoer under the law of mistake and restitution if the wrongdoer can be found.67
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