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We have a representative payee account. The beneficiary of the account came into a branch and, without permission from the representative payee, withdrew money from the account in cash. Will the bank be held liable to anyone for this, and what steps should we take? – IBA Compliance Connection

IBA Compliance Connection

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We have a representative payee account. The beneficiary of the account came into a branch and, without permission from the representative payee, withdrew money from the account in cash. Will the bank be held liable to anyone for this, and what steps should we take?

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We believe that the withdrawal would be considered unauthorized and that the bank could be liable for the unauthorized withdrawal, if no defenses under the Uniform Commercial Code apply.

Under the Social Security Administration (SSA) regulations, a representative payee is selected is selected after determining that the beneficiary of the payments is unable to manage his or her benefits, and only the representative payee is responsible for managing the payments. 20 CFR 416.601(b)20 CFR 416.635(a). Because the account beneficiary did not have the right to directly access the account (and presumably was not an authorized signer for the account), the bank could be liable to the representative payee for the unauthorized withdrawal. The Uniform Commercial Code (UCC) would govern, and it applies the same general rule to unauthorized withdrawal slips as it would to unauthorized checks: the bank is liable for any unauthorized withdrawals. 810 ILCS 5/4-401(a)Newell v. Newell, 406 Ill.App.3d 1046, 1050 (3rd Dist. 2011). (There are exceptions to this general rule, for example when a customer fails to notify the bank about the unauthorized withdrawal within a reasonable period of time. 810 ILCS 5/4-406(e).)

 If, as we discussed, the representative payee wishes to remove herself as representative payee, she would have to contact the Social Security Administration directly. Under the SSA rules, the representative payee would have to return the beneficiary’s social security funds to the SSA, which will transfer the funds to a new account after appointing a new representative payee. 20 CFR 416.640(e)(5)(ii).