IBA Compliance Connection

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We received a Fedwire transfer request and paid the funds into our customer’s account. The next day, we learned from the originating bank that it very likely was a fraudulent transaction (related to an email scam), where someone impersonated the originator to initiate the transfer. The originating bank has requested that we return the funds, and we froze our customer’s account before he could withdraw the funds. We have confirmed the identity of the originator and originating bank and obtained a copy of the originator’s police report. Do we need any other documentation before returning the funds?

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No other documentation is required. The process of returning the wired funds is not governed by any laws or regulations related to Fedwire transfers. We recommend reviewing your account agreement with the customer to ensure that you are within your rights in freezing and removing funds from the customer’s account (which is likely in this situation, since it appears that the customer was involved in the fraud). Also, we are aware that some institutions require an indemnification from the originating bank before agreeing to return wired funds in order to reduce your liability to your customer, who was the recipient of the wire transfer.

For resources related to our guidance, please see:

  • Regulation J, 12 CFR 210.25(b) (Incorporating Article 4A of the Uniform Commercial Code.)
  • Uniform Commercial Code, 810 ILCS 5/4A-211(c) (“After a payment order has been accepted, cancellation or amendment of the order is not effective unless the receiving bank agrees or a funds transfer system rule allows cancellation or amendment without agreement of the bank.”)
  • Uniform Commercial Code, 810 ILCS 5/4A-211, Official Comment 4 (“The following examples illustrate subsection (c)(2): . . . Case #1. Originator’s Bank executed a payment order issued in the name of its customer as sender. The order was not authorized by the customer and was fraudulently issued. Beneficiary’s Bank accepted the payment order issued by Originator’s Bank. Under subsection (c)(2) Originator’s Bank can cancel the order if Beneficiary’s Bank consents . . . . Cancellation of the payment order to Beneficiary’s Bank causes the acceptance of Beneficiary’s Bank to be nullified. Subsection (e). Beneficiary’s Bank is entitled to recover payment from the beneficiary to the extent allowed by the law of mistake and restitution. In this kind of case the beneficiary is usually a party to the fraud who has no right to receive or retain payment of the order.”) (emphasis added)
  • Cumis Ins. Soc., Inc. v. Citibank, 921 F.Supp. 1100 (S. D. NY, 1996) (Once a receiving bank accepts a Fedwire transfer, the decision to return the funds under UCC § 4A-211 “was in Citibank’s sole discretion. . . . In this case, Citibank offered to return the funds conditioned on receipt of a tested telex with an indemnification.”