What you should know about wire-transfer liabilities.

• Author: Brandon, George
• Position: Includes related article - Technology

Although more than $1 trillion is moved among businesses by wire transfers every business day, until this year no law regulated all of the responsibilities of the parties involved. No piece of regulation defined each party's rights in the event of a problem with a particular transfer. That, however, is changing rapidly.

The Uniform Commercial Code, which is in effect in largely the same form in nearly all 50 states, sets forth rules that govern such commercial transactions as the sale of goods and those that involve commercial paper such as checks and notes. A proposed amendment to the UCC-that will become Article 4A of the code-already has been adopted by a number of states and establishes standards for commercial wire transfers. indeed, as of mid-1990, 14 states-including the banking centers of New York, California, and Illinois-have adopted or will soon complete the legislative process necessary to adopt Article 4A. (See page 42 for a listing of the 14 states and the status of the legislation.) By the end of 1991, more than half of the states likely will have adopted it, and the vast majority of those who haven't are likely to follow suit within a year or two thereafter.

The adoption of Article 4A will, among other things, allow parties to wire transfers (principally banks and their business customers) while predicting risk with more certainty and to adjust their operational and security procedures appropriately. The new rules will affect wire transfers in two of the most important areas left unclear by current law: fraudulent transfers and erroneous transfers.

These two areas have seen a relatively large amount of litigation in the past. In one leading case, for instance, a bank failed to execute a $27,000 payment order and was sued for $2.1 million after the originator of the wire transfer lost a valuable ship charter. That suit went as far as a federal appellate court before it was finally resolved in the bank's favor.

Whether a wire transfer is made by the Federal Reserve wire transfer network (Fedwire), the New York Clearing House Interbank Payments Systems (CHIPS), or some other method, the procedure is relatively standard.

A business, or the "originator" of the wire transfer, issues an instruction ("a payment order") to its bank, which in turn instructs an intermediary bank, if necessary, or the bank of the intended recipient (the beneficiary") to pay or credit a fixed amount to the beneficiary on behalf of the originator. For the most part, each of the payment orders sent by each entity to the next is transmitted electronically. (Because there may be a non-electronic communication in the series of orders, the drafters of Article 4A refer to these transfers as "funds transfers," not wire transfers.)

These electronic transfers are perhaps the most efficient payment system available today, far superior...