procedure established by agreement between the customer and the bank to verify that a wire was actually authorized by the customer or to detect errors in its transmission or content. Without an agreed-upon security procedure, the bank may bear the loss from an unauthorized wire transfer. Merely having a security procedure, however, is not enough. It must also be commercially reasonable. Commercial reasonableness is determined by considering factors such as the customer’s expressed wishes; the size, type and frequency of the customer’s typical wire transfers; alternative procedures offered by the bank; and procedures commonly used by similarly situated banks and customers. Importantly, Article 4A does not require the bank to employ the best available security procedure. The question is whether the procedure is reasonable for that particular bank and customer. Banks must also follow the procedure they establish. A well-drafted agreement offers little protection if employees bypass the required authentication steps when processing a wire transfer. Likewise, Article 4A requires the bank to act in good faith — meaning both honesty in fact and observance of reasonable commercial standards of fair dealing. What if a Hacker Compromised the Customer? Even where the bank satisfies these requirements, the analysis may not be over. Under UCC § 4A-203, the customer may avoid liability by establishing that the fraudulent order was not caused, directly or indirectly, by someone entrusted with wire responsibilities, someone who obtained access to the customer’s transmitting facilities, or someone who obtained security information from a source controlled by the customer. That can make the source of the compromise enormously important. If a fraudster gained access through the customer’s own systems or transmitting facilities, the customer may ultimately bear the loss even though the customer did not intentionally authorize the transfer. Don’t Overlook Beneficiary Name and Account Number Discrepancies Another increasingly important issue involves fraudulent wire instructions that identify the intended beneficiary by name but provide an account number belonging to the fraudster. UCC § 4A-207 generally permits a beneficiary’s bank to rely on an account number in processing a wire under specified circumstances. Banks should therefore ensure that their account and wire agreements clearly explain that payment may be made based on the account number supplied by the originator, even when the beneficiary name identifies someone else. Banks should not assume, however, that § 4A-207 eliminates every possible source of liability. Some courts have permitted a negligence theory against a beneficiary bank when the allegations identified significant problems surrounding the opening and maintenance of the fraudster’s account and the bank’s knowledge of discrepancies involving the beneficiary information. Takeaway for Banks Wire fraud liability frequently hinges on decisions made long before the fraudulent wire arrives. Banks should periodically review their wire agreements and security procedures, confirm that the procedures remain commercially reasonable for their customers, document alternative security measures offered to customers, train employees to consistently follow established procedures and include appropriate beneficiary name/account number provisions in their agreements. When a fraudulent wire occurs, speed matters — but so does the bank’s documentation. A bank that can demonstrate exactly which security procedure was agreed upon, why it was commercially reasonable and how it was followed will be in a substantially stronger position. BancMac provides correspondent and wholesale lending and is your Community Bank Mortgage Partner to help your financial institution originate fixed-rate secondary market loans including: PROGRAMS • Conventional Loans • USDA Rural Development Loans • Rural Living (Hobby Farm) Loans • VA Loans • FHA Loans OUR PARTNERS RECEIVE: • Superior Service & Competitive Pricing • No Minimum Volumes • Significant, Non-Interest Fee Income • Non-Solicit Protections & More BANCMAC COMMUNITY BANC MORTGAGE CORP. YOUR COMMUNITY BANK MORTGAGE PARTNER bancmac.com mortgages@bancmac.com 888.821.7729 | NMLS# 571147 The Show-Me Banker Magazine | 21
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