BUSINESS LAW 101 / BANKS AND LARGE FINANCIAL TRANSFERS

By Albert L. Kelley, Esq.

If a bank is supposed to make an electronic transfer of $100 at 9:30 a.m., there really isn’t much liability if it doesn’t get processed until midnight. At 5% interest, the interest lost is around $0.01. But what if the transfer is for a million dollars? At 5% interest, one day equals nearly $1,400.00. There are many companies that transfer millions of dollars each day. For these large transactions, there is a special portion of the UCC that governs the transaction, but only when the transfer is between highly sophisticated parties, that is, any entity that routinely handles such transactions. It specifically does not apply to consumer transactions, and it does not apply when the transfer is not between banks.

In these large transactions, the money doesn’t actually change hands. The one bank doesn’t really send the funds to the other bank. That would be too time-consuming for the customers. Rather, there is a series of electronic transfer instructions. As an example, my business may instruct my bank to make a transfer of one million dollars to Bob Smith’s business. This is called the Payment Order. My bank then contacts Smith’s bank and instruct them to transfer the funds to Smith’s account. This is also called a Payment Order. However, there is no obligation by Smith’s bank to accept this Order. A Payment Order does not have the same weight as a draft. They can reject the Order. If, however, Smith’s bank puts the funds into his account, then the Order has been accepted, and my bank must then pay Smith’s bank from my account. The actual transaction takes place much later, but Smith gets credit for it now. Often, banks will use intermediary banks to assist with these transfers. In that case, the Payment Order would go from my bank to an intermediary bank and then to Smith’s bank. The intermediary bank is generally a large institution that can immediately transfer large sums.

Most of the work on a large funds transaction takes place on computers. Little is actually done in writing. What if there is an error along the way? Perhaps the account number was mistyped. Or perhaps the instructions are routed to the wrong bank. What happens then? If the money is routed to the wrong person, the wrong account, or if there is an overpayment or duplication, then the bank that made the mistake is liable for it. Thus, if the instructions from my bank were to pay Smith a million dollars but the intermediary bank makes a mistake causing an overpayment to Smith of two million dollars, they are not entitled to be reimbursed for the overage. They must send the extra million to Smith’s bank, and can’t ask my bank to reimburse them. Likewise, if Smith’s bank rejects the Order but does not communicate the rejection in a timely manner, they are liable for the interest lost.

All of these transactions have various security measures to ensure they are correct and that the transaction proceeds properly. The banks have an obligation to ensure that their security measures are being complied with. If the bank fails to comply with their security provisions to ensure correctness they take the risk of loss for their failure. If the security procedure is followed, there is generally little liability to the bank and little risk of an error to the customers.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. He is also the author of “Basics of Business Law” and “Basics of Florida’s Small Claims Court” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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