Managing The Risks of Payment System

Contents
Preface xiii
Chapter 1 “We Didn’t Know” Is No Excuse 1
What Is a Payment System? 1
Payment Systems 2
Liability for Fraud Losses: The Law
and the Contract with the Bank 3
Bank Shifting Its Statutory Liability to the
Customer: Examples 4
New Frontier in Cyberspace 5
Chapter 2 Payment Systems Survey 7
Barter 7
Coins 8
Paper Money 8
Drafts Become Paper Money 8
Notes Become Paper Money 10
Evolution of Fiat Money
in the United States 11
New York Clearing House Association 11
Check Systems 14
Electronic Payments 15
Fedwire 15
Net Settlement Services 17
CHIPS 17
CHIPS Funds Transfer: Example 18
ACH 19
SWIFT 20
Why SWIFT Is “Swift” 20
How the SWIFT System Works 20
Chapter 3 Checks and the Risk of Fraud 23
Negotiable Instruments 23
Drafts 24
Check Law 29
Some Definitions 29
Paid and Accepted (Certified) Checks 30
Bearer Paper 31
Negotiation and Endorsement 32
“Holder in Due Course” Doctrine 32
Due Course 34
Notice of Fraud or Defenses to Payment 35
Risks to Others Because of the Rights
of a Holder in Due Course 36
Shelter Principle 37
Check System in the United States 38
Bank Deposits and Collections:
The Depository Bank—Provisional
versus Final Payment of a Check 38
Payor Bank: “Final Settlement”
of Presentments 39
Fraud and Forgery 41
Basic Rule with Respect to Fraud 41
Exceptions to the Basic Rule 42
Comparative Fault 44
Payor Bank’s Recourse against
Collecting Banks 45
Variation by Agreement: Warning to
Treasury Managers and Their Lawyers 46
Fraudulent Endorsements 47
Managing Risks of the Check
Payment System: Company That
Issues Checks 50
Internal Controls 50
Bank Controls 51
Check Stock 52
Positive Pay Arrangements 53
Company That Receives Checks 55
Receipt 55
Chapter 4 Wire Transfers: Originator to Its Bank to
Receiving Bank 59
Links in the Funds-Transfer Chain 59
Originator and Its Bank 61
Nonacceptance of Payment Orders 62
Bank’s Right to Reject Orders:
Eliminate Interest Obligation 63
Cancellation and Amendment of Payment
Orders 64
Acceptance and Execution of the Originator’s
Payment Order 68
“Money-Back Guarantee” 77
Statute of Repose 79
Liability for Fraudulent Funds Transfers 81
Notes for Negotiators of Funds-Transfer
Agreements 82
Liability for Misdescription of the Beneficiary 83
Interest 83
Next Link in the Funds-Transfer Chain:
Sending and Receiving Banks 84
Originating Company’s Money-Back Guarantee 86
Managing Risks in the Links of the Wire
Transfer Payment System 86
Originator and Its Bank 86
Sending and Receiving Banks 87
Study of a Bank’s Perspective of Funds-
Transfer Risk Management: Wire Transfer
Systems Lend Money to Customers 88
Why Do Banks “Lend” Money for Transfers?
Intra-Day Loans 88
What Is
Payment of the Beneficiary and
Discharge of the Underlying Obligation
between the Originating Company
and the Beneficiary 104
Managing Risks in the Links of the Wire
Transfer Payment System 120
Beneficiary and the Beneficiary’s Bank 120
Rules for Errors 121
General Rule for Customer Errors 121
Misdescription Errors 122
Misdescription of a Bank 128
Error-Detection Security Procedures
Chapter 6 Risks of Automated Clearing
House Payments 141
Overview 141
Definitions 142
Origination of ACH Entries 144
Warranties and Liabilities of the ODFI 150
What Is an Indemnity? 154
ACH Prenotification 155
Reversing Duplicate and Erroneous Files 155
Reversing Duplicate and Erroneous Entries 157
Originating Destroyed Check Entries 158
Reinitiation of Returned Entries
to Originators 159
Miscellaneous Obligations of Originators 159
Receipt of Entries: RDFIs and Receivers 160
Receipt and Availability of Entries 162
Receiver and Originator: Closing the Loop 164
Returns, Changes, and Acknowledgments 165
Exceptions to the Two-Banking-Day
Deadline for Returns 165
Refusal to Accept Returned Entries
(“Dishonor”) 167
Notification of Change 168
Acknowledgments 169
Settlement and Accountability 169
Security Procedures 171
Settlement 172
“Troubled” Sending Banks 173
Cross-Border Payments 174
Federal Government Payments 175
Risks of the ACH Payment System 177

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