SafeAlert - November 2000

Fraudulent Wire Transfers

Over the past year we have seen an increased number of claims involving fraudulent wire transfer requests. The requests were faxed to the financial institution and purportedly contained the signature of an authorized signatory on an account. The transfer requests would target commercial or governmental accounts and were for amounts in the six figures. After executing the requests, the institutions learned the signatures were forgeries and that the funds had been withdrawn from the institutions receiving the transfers.

In all cases, the financial institutions had account agreements with their customers that authorized the institution to act on faxed wire transfer requests. The agreements stipulated that the institution would not be liable for unauthorized transfer requests. Unfortunately, these agreements were ineffective in preventing loss to the institution.

Uniform Commercial Code (UCC) Article 4A, which has been adopted in most jurisdictions, governs wire transfers. UCC Section 4A-202 provides that an unauthorized transfer request will only be effective as the payment order of the customer when the institution acted in good faith and used a commercially reasonable security procedure, agreed to by the parties, to verify the request. Moreover, it provides that the rights and duties under this section cannot be varied by agreement.

Section 4A-201 states that signature verification alone does not constitute a “security procedure.” It further provides, however, that a valid “security procedure” can encompass something as simple as a callback procedure or password.

If your institution does not have a written agreement with your customers governing wire transfer requests one should be established. Moreover, all agreements must contain commercially reasonable security procedures that are agreed to by the parties. A simple agreement utilizing a callback procedure can protect from significant potential liability.

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