12 Hoosier Banker April 2016 DIRECTORS / SENIOR MANAGEMENT Treasury management agreements often remind me of the Winchester Mystery House. The Winchester Mystery House is a beautiful, sprawling and bizarre Victorian mansion located in San Jose, California. The story goes that Sarah Winchester, reeling from the untimely deaths of her infant daughter and husband, William Wirt Winchester (whose father founded the Winchester Repeating Arms Company), consulted a medium. The medium advised Mrs. Winchester that her family and fortune were being haunted by the spirits of American Indians, Civil War soldiers and others killed by the Winchester repeating rifle ‒ a.k.a. “The Gun That Won the West.” The medium instructed Mrs. Winchester to move West and build a great house for the spirits. So long as construction never stopped, the spirits would be appeased. Thirty-eight years of uninterrupted construction, beginning in 1884, transformed a tidy, eight-room house into a rambling maze of a mansion with 160 rooms and nearly as many architectural oddities: a staircase that descends seven steps and then rises 11, columns installed upside down, stairs that lead to the ceiling, doors that go nowhere, and more. For many financial institutions, their treasury, or cash management, agreements started out like the original, eight-room Winchester house: neatly constructed and limited in purpose, perhaps at first addressing basic ACH services. With the addition of each “room” ‒ online business banking, positive pay, sweep accounts, lockbox, remote deposit capture ‒ the agreements grew bigger and disjointed, perhaps even unintentionally conflicting, like stairs leading to a ceiling. Such add-on drafting of treasury management agreements creates fraud, operational, regulatory and legal risks. A comprehensive review and update of your bank’s treasury management and other related bank agreements can mitigate these risks and provide additional benefits to your bank, such as reducing fraud losses. Reduce Fraud Losses Are your bank’s agreements structured to take advantage of changes in the law? With the exponential increase in wire and other electronic transfers between commercial accounts comes increased cyberrisk and the related risk of unauthorized transactions. The general rule is that the bank bears the risk of loss for fraudulent transfers from a commercial deposit account.1 UCC Article 4A provides a key exception to this rule, but your bank’s agreement must be properly structured to take advantage of it. If a bank and its customer have an agreement as to what constitutes a commercially reasonable security procedure,2 the risk of loss for fraud shifts to the customer if the bank proves that it accepted a fraudulent payment order: in good faith, and in compliance with the security procedure and any written agreement Key Risk Issues Every Treasury Management Officer Should Consider About the Author Lori Jean is a partner with Krieg DeVault LLP, Indianapolis, and a member of the firm’s financial institutions practice group. Her background spans 26 years in the corporate and legal industries. Prior to joining Krieg DeVault, she served as senior vice president, assistant general counsel and chief compliance officer for 1st Source Bank, South Bend. Previously she was assistant general counsel for Coachmen Industries Inc., senior managing counsel for Tellabs Operations Inc. and a partner at the law firm of Baker & McKenzie. Jean earned an undergraduate degree from Butler University and a JD from the Villanova University School of Law. The author can be reached at 574-485-2011, email: ljean@kdlegal.com. Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association.
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