An international bank has wired funds to one of our customers. We believe that the wire was fraudulent and that the customer could possibly be a party to the fraud. If the international bank decides to recall the wire, may we send back the funds without the customer’s permission if the customer insists that the wire was not fraudulent? We currently have the funds frozen.

In certain narrow circumstances described below, we believe that you may send the funds back to the originating bank without the customer’s permission — but there is no guarantee that you will be able to recover the funds from your customer after refunding the originating bank.

Under the Uniform Commercial Code (UCC), once your bank has accepted funds on behalf of a customer via a wire transfer, you are obligated to pay the amount of the order to the beneficiary (with limited exceptions). However, the UCC allows for the cancellation of an accepted payment order without your customer’s consent in certain narrow circumstances: if your bank consents (as the receiving bank) and payment order was “issued in execution of an unauthorized payment order, or because of a mistake by a sender in the funds transfer which resulted in the issuance of a payment order (i) that is a duplicate of a payment order previously issued by the sender, (ii) that orders payment to a beneficiary not entitled to receive payment from the originator, or (iii) that orders payment in an amount greater than the amount the beneficiary was entitled to receive from the originator.”

If your bank believes that one of those conditions is met here (which would be difficult without more specific information about the potential fraud), you could return the funds to the originating bank. Your bank then would have to recover the refunded amount from your customer “to the extent allowed by the law governing mistake and restitution.”

While you have frozen your customer’s funds, your customer likely will object if you refund the originating bank and attempt to recover the refunded amount from your customer’s frozen funds — particularly because the customer apparently believes the wire transfer was not fraudulent. Consequently, we strongly recommend that you review this situation and discuss the specifics of raising a claim based on the law of mistake and restitution with bank counsel before refunding the international bank.

Additionally, if you suspect that your customer is engaging in fraud, we recommend filing a suspicious activity report with the FDIC. FDIC-supervised institutions are required to file suspicious activity reports for transactions involving or aggregating $5,000 or more if the bank knows, suspects, or has reason to suspect that the transaction involves potential money laundering or violations of the Bank Secrecy Act.

For resources related to our guidance, please see:

Uniform Commercial Code, 810 ILCS 5/4A-404(a) (“Subject to Sections 4A-211(e), 4A-405(d), and 4A-405(e), if a beneficiary’s bank accepts a payment order, the bank is obliged to pay the amount of the order to the beneficiary of the order. . . . If the bank refuses to pay after demand by the beneficiary and receipt of notice of particular circumstances that will give rise to consequential damages as a result of nonpayment, the beneficiary may recover damages resulting from the refusal to pay to the extent the bank had notice of the damages, unless the bank proves that it did not pay because of a reasonable doubt concerning the right of the beneficiary to payment.”)
Uniform Commercial Code, 810 ILCS 5/4A-404, Official Comment 3 (“Under the last clause of subsection (a) the beneficiary’s bank is not liable for damages if its refusal to pay was ‘because of a reasonable doubt concerning the right of the beneficiary to payment.’ . . . The last clause of subsection (a) does not apply to cases in which a funds transfer is being used to pay an obligation and a dispute arises between the originator and the beneficiary concerning whether the obligation is in fact owed. For example, the originator may try to prevent payment to the beneficiary by the beneficiary’s bank by alleging that the beneficiary is not entitled to payment because of fraud against the originator or a breach of contract relating to the obligation. The fraud or breach of contract claim of the originator may be grounds for recovery by the originator from the beneficiary after the beneficiary is paid, but it does not affect the obligation of the beneficiary’s bank to pay the beneficiary. Unless the payment order has been cancelled pursuant to Section 4A-211(c), there is no excuse for refusing to pay the beneficiary and, in a proper case, the refusal may result in consequential damages. Except in the case of a book transfer, in which the beneficiary’s bank is also the originator’s bank, the originator of a funds transfer cannot cancel a payment order to the beneficiary’s bank, with or without the consent of that bank, because the originator is not the sender of that order. Thus, the beneficiary’s bank may safely ignore any instruction by the originator to withhold payment to the beneficiary.”)
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. . . .(2) With respect to a payment order accepted by the beneficiary’s bank, cancellation or amendment is not effective unless the order was issued in execution of an unauthorized payment order, or because of a mistake by a sender in the funds transfer which resulted in the issuance of a payment order (i) that is a duplicate of a payment order previously issued by the sender, (ii) that orders payment to a beneficiary not entitled to receive payment from the originator, or (iii) that orders payment in an amount greater than the amount the beneficiary was entitled to receive from the originator. If the payment order is canceled or amended, the beneficiary’s bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution.”)
Uniform Commercial Code, 810 ILCS 5/4A-211, Official Comment 4 (“ . . . Under subsection (c)(2), cancellation or amendment is possible only in the four cases stated. 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.”)
FDIC Suspicious Activity Report Rules, 12 CFR 353.3(a)(4) (“A bank shall file a suspicious activity report with the appropriate federal law enforcement agencies and the Department of the Treasury, in accordance with the form’s instructions, by sending a completed suspicious activity report to FinCEN in the following circumstances: . . . Any transaction conducted or attempted by, at or through the FDIC-supervised institution and involving or aggregating $5,000 or more in funds or other assets, if the FDIC-supervised institution knows, suspects, or has reason to suspect that: (i) The transaction involves funds derived from illegal activities. . . . (ii) The transaction is designed to evade any regulations promulgated under the Bank Secrecy Act; or (iii) The transaction has no business or apparent lawful purpose or is not the sort of transaction in which the particular customer would normally be expected to engage. . . .”)