The potential abuses and risks related to wiring of funds to subcontractors, suppliers, lenders, or others, and in receiving wires of funds, have gotten so extreme that I now refuse to wire funds or have funds wired to me. It has gotten to a point that I strongly recommend to our clients that they avoid wires of funds.
It's back to the old-fashioned way for me: checks, tellers checks, or certified checks get the job done, thank you. (I'd suggest paying by delivering the Benjamins, but perhaps that's too extreme.)
Obviously, the wiring of funds had been a reliable way to transmit funds quickly. Real estate and loan closings were routinely handled by wire. Wiring funds to vendors and receiving funds by wire from owners or other upper tiers also became an effective way to do business. However, over the years, even setting aside the potential for fraud, wiring of funds to others or getting funds by wire became anything but quick or reliable in my view.
In some instances, wires took 2–3 days to reach the intended recipient. That was certainly beyond what was expected or intended and obviously caused a significant amount of agita and aggravation to the parties directly involved. Now, with the amount of fraud involved in wiring transactions and the higher risk of loss of the funds, wiring is a nonstarter in my mind, even if wiring were otherwise reliable.
Typical Fraud from Wiring Funds
The fraud typically involves creative scammers and the dregs of society who send contractors or others in the industry something that looks like a valid invoice from a vendor. The invoice looks like an invoice from your insurer or from a supplier, equipment company, lender, or another creditor. Your accounts payable personnel review and then approve the invoice and wire the funds to the vendor using the wiring information on the invoice.
Sometime later, you get a collection call from the vendor asking why the invoice was not paid. You then double-check and find that the funds were wired. However, the wire did not go to the vendor's account but to some phony/phantom account. Now what?
We recently had two clients fall prey to this type of scam. In one case, the banks were alerted to the scam in time, so the hundreds of thousands of dollars that had been wired were not lost. In another case, which we are now litigating, the bank is refusing to return the funds to our client.
What To Do in the Event of Fraud
First thing, notify the bank immediately. If this happens to your company, you may be able to get some relief from your bank by immediately notifying them that the funds were wired to a phony account and asking them to replenish your account. Ask your bank to advise you of the name of the bank to which the funds were wired (if you do not already know the name of that institution). Notify that institution as well. If your bank (obviously known as the "sender bank") or the bank that received the wire (known as the receiving, recipient, or beneficiary bank) did not disburse the funds to the phony account, then it should not be a problem.
Sometimes, these phony wires are caught before disbursement by an alert bank. That is what happened in the first client case mentioned above. Once either the sender or receiving bank has knowledge of the fraud and receives notice before the funds are disbursed, they should stop the transmittal and—after investigating to ensure the wire was going to go to a false/phony account—should place the funds back into your account.
If the funds were paid to the phony account, you have some options, none of which is really palatable or appealing.
One option is to try to identify the scammer. This, generally, "ain't gonna happen." It's probably no use calling the Federal Bureau of Investigation or local police. They seem helpless, clueless, unprepared, and unwilling to address this type of prevalent crime. First, of course, you have to figure out the locality to call. Is it the police department where your bank is located, where the receiving bank is located, where the vendor has its office, or where the scammer is? If you can figure that out and do call the authorities, then you very likely will be told that you are not the first one to make the complaint. Hey, thanks a lot!
You may be able to recover through your insurance. That's a big "depends." I will have to leave that to the insurance experts here at IRMI to follow up on that.
You may have recourse against your vendor. If the vendor knew there were issues with wires being sent to the vendor and did not alert you, then the vendor has fault and responsibility, at least in my mind.
Another option is to try to recover the funds from one of the banks involved. Clearly, though, you have very little chance of recovering from your bank or the bank that disbursed the funds to the phony entity. That is because the sender bank and the receiving bank are protected by provisions of the Uniform Commercial Code (UCC). Those provisions apply to most commercial transactions in most states. Since the banks are protected, your recourse against those banks is limited.
The standard in most states is determining whether the receiving bank actually knew that the funds were being delivered to a phony account. That is, you would have to show that the receiving bank actually knew that the account number that you listed for the wire and to which you wanted the funds to be delivered did not belong to the company that you named in the wiring instructions. The reason: the receiving bank is allowed to rely only on the account number listed by you for the wire and does not have to match the account number with the name of the company designated in the wire instructions to receive the funds. As long as the receiving bank delivers the funds to the account number that you listed, the receiving bank is freed from fault, even if the account number does not belong to the company that you listed as the intended recipient.
The result seems harsh. My first reaction was that a bank that receives wired funds should be required to match the account number that you listed with the name of the company to which you wired the funds. That way, the receiving bank can ensure that the funds are delivered to the proper, intended vendor.
However, the policy under the UCC is to allow for rapid and fluid commercial transactions. The UCC expects that if every time funds are wired and a receiving bank is forced to match the account number on the wire to the name of the business to which the wire was intended, that would create major bottlenecks for banks and slow them down, given the number of electronic transfers that the banks handle.
The risk, then, clearly is placed on the company sending the wire to ensure that the account number to which the funds are wired is correct. Otherwise, the company sending the wire would have to show that the receiving bank somehow knew that the account to which the funds were wired was not the account of the company listed on the wiring instructions to receive the funds.
I suppose it is possible to prove that. If you can show that the receiving bank had prior complaints about misdirected wires—and still delivered your company's funds to that wrong account—that should work. Another way would be if you could show that a bank employee in the receiving bank was tied in with the scammer and intentionally misdirected the funds to the phony account. The possibility of collusion between a receiving bank employee and a scammer should not be discounted. However, being able to prove either of those events (prior knowledge by the receiving bank of the fraud or complicity between a bank employee and the dreg of society committing the fraud) seems, how shall we say, a bit challenging.
I also would consider a claim against your own bank, the sender bank. To make a wire, most banks or financial institutions require detailed wire instructions, including listing the account number to which the funds are to be delivered and the name of the account holder that will receive the wired funds. That certainly seems to tell me that the name on the account will be matched with the account number at some point before the funds are disbursed to ensure that the funds are accurately disbursed. After all, if a receiving bank is not required to match the account number with the name to be sure they match and are correct, then why do you have to give that information to initiate a wire?
What Does the Law Say?
The law was discussed in a recent case in my area in New York involving a substantial wire to a phony account. The sender listed an account number into which the wired funds were to be placed. The sender also listed the name of the company that the sender wanted to receive the funds and whom the sender thought owned the account.
Wells Fargo delivered the funds to the account number listed for the wire. However, the account number did not belong to the company that was the hoped-for recipient and which was named in the wire instructions. Since the funds did not go to the intended recipient, the sender had to make another payment to that intended recipient. (Shall we bet on whether that follow-up payment was made by wire?)
The sender then sued Wells Fargo to replace the funds. The court ruled in favor of Wells Fargo and against the sender, saying that Wells Fargo did not have any duty or obligation to match the account number listed on the wiring instructions with the name of the company that was supposed to receive the funds. The trial level court in Westchester County (just north of Manhattan) explains as follows in Targoff v. Wells Fargo Bank, N.A., 67 Misc.3d 504 (Supreme Court Westchester County New York 2020).
Article 4-A of the UCC governs the procedures, rights and liabilities arising out of commercial electronic funds transfers.… Article 4A controls how electronic fund transfers are conducted and specifies certain rights and duties related to the execution of such transactions.… [P]arties whose conflict arises out of a funds transfer should look first and foremost to Article 4-A for guidance in bringing and resolving their claims.
Under Uniform Commercial Code § 4-A-207, if a beneficiary's [recipient's] name does not match the account number provided on a payment order received by the beneficiary [receiving] bank, and "the beneficiary [receiving] bank does not know that the name and number refer to different persons, it may rely on the number as the proper identification of the beneficiary [recipient]of the order. The beneficiary's [recipient's] bank need not determine whether the name and number refer to the same person" (UCC 4–A–207  [a]). Therefore, by the statute's explicit terms, a bank such as Wells Fargo, that accepts a wire transfer and credits the proceeds to the account number designated by the originator [sender], has handled the wire transfer properly as long as it does not have actual knowledge that the recipient's account belongs to someone other than the intended beneficiary.
Numerous trial level courts have recognized that banks act property in accepting a wire transfer "where the beneficiary's name and account number do not match but, under certain conditions, the funds transfer can still go forward based on the beneficiary's account number alone.… Section 4-A-207 itself forecloses any duty on the part of the beneficiary bank: it specifically states that '[t]he beneficiary's bank need not determine whether the name and [account] number refer to the same person'.…
Since plaintiff neither alleges that [Wells Fargo] had actual knowledge of the discrepancy between the transferee's name and the account number, nor suggests any basis for such an inference, section 4–A–207 forecloses any duty on the part of [Wells Fargo] the beneficiary bank. Defendant bank [Wells Fargo] was entitled, under the UCC, to rely on the account number that plaintiff provided when arranging for the wire transfer, and no liability on the part of the bank is established by the bank's failure to ensure that the transferee's name matched the name on the account.
The sender, in that case, also made a claim against Wells Fargo for negligence, saying that Wells Fargo should have known that the funds were being delivered to a phony account and was negligent in making the transfer. The court rejected that as well, saying the following.
Moreover, plaintiff cannot state a cause of action for common law negligence. A negligence claim requires that the defendant owe a duty to the plaintiff.… A bank owes no duty of care to non-customers.… "The general rule is that a bank does not owe a duty to a non-customer third party.… [T]o hold that banks owe a duty to their depositors' creditors to monitor the depositors' financial activities would be to unreasonably expand banks' orbit of duty." Moreover, common law claims are precluded "when such claims would impose liability inconsistent with the rights and liabilities expressly created by Article 4-A" of the Uniform Commercial Code.
Thus, the UCC makes clear that if your company, as the sender, specifies the account number to which the funds are to be wired and the funds are delivered to that account number, the banks are not at fault if the account number does not match the name of the vendor to whom you intended to send the funds.
Given what I consider to be the inherent unreliability of wiring of funds and adding to that the risk of loss due to a wayward wire, I would avoid wiring funds or having others wire funds to you. My view is that the tried and true "check in the mail" system works best and should be favored over the wiring option.
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