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What Is a Wire Transfer?

posted by Adam Levitin

Heads up payment nerds: we have what promises to be the most interesting payments litigation involving a Citibank wire transfer since...the last payments litigation involving a Citibank wire transfer.

In the latest case, the NYAG has sued Citibank for violating the Electronic Fund Transfer Act in connection with wire transfer transactions for consumer customers. The EFTA offers consumers substantial protection against unauthorized electronic fund transfers, both in terms of process and substantive liability limitations. The  NYAG alleges Citibank has not been providing these required protections to consumers who have had their accounts drained by unauthorized wire transfer orders.  

Now you might be saying, "I feel bad for the consumers, but come on, everyone knows that the EFTA doesn't apply to wire transfers." And you might even point to the EFTA definition of an "electronic fund transfer" as excluding "any transfer of funds, other than those processed by automated clearinghouse, made by a financial institution on behalf of a consumer by means of a service that transfers funds held at either Federal Reserve banks or other depository institutions and which is not designed primarily to transfer funds on behalf of a consumer." And you'd be right—both the NYAG and Citibank agree that the EFTA does not apply to wire transfers.  The issue in the case is "what is the wire transfer?"

The NYAG's argument is that when a customer directs Citibank to send a wire transfer to someone (the "Beneficiary") there are actually three separate payment transactions involved:  (1) customer to Citi, (2) Citi to Beneficiary's Bank, and (3) Beneficiary's Bank to Beneficiary. The NYAG's argument is that the EFTA exception for wire transfers  carving out transaction (2), the interbank wire transfer through FedWire. The transfer of funds from the customer to Citi doesn't happen through FedWire and is not actually part of the wire transfer. The transaction chain is illustrated below (taken from the NYAG complaint):

NY AG Graphic

A wire transfer is initiated by a payment order from a Sender (the customer) to a Receiving Bank (Citi). But that isn't a payment. It is just an instruction, that is a communication, and it does not by itself create a payment obligation. Instead, UCC Article 4A-402(c) provides that "With respect to a payment order issued to a receiving bank other than the beneficiary's bank [i.e., Citibank], acceptance of the order by the receiving bank [Citibank] obliges the sender [the customer] to pay the bank [Citibank] the amount of the sender's order." A receiving bank other than a beneficiary's bank accepts a payment order when it executes it. The UCC is also quite clear that payment on that obligation can be in any form. While UCC 4A-403(a)(3) contemplates Citibank just debiting the customer's account, that's only possible if the customer has an account and the account has adequate funds. If not, then UCC 4A-403, Cmt. 5 explains that payment would be "by cash, check, or bank obligation."

In other words, the movement of funds from the customer to Citibank doesn't use a wire.  It's only the movement of funds from Citibank to the Beneficiary's Bank that occurs via the FedWire system, which is a combination messaging & clearing system, but the interaction between the customer and Citibank involves separate messaging and clearing systems, and the clearing systems involved are not transfers of funds "made by a financial institution on behalf of a consumer by means of a service that transfers funds held at either Federal Reserve banks or other depository institutions and which is not designed primarily to transfer funds on behalf of a consumer." Those are only the interbank transfers; the electronic debiting of the customer's account at Citi to fund the interbank wire is, according to the NYAG, squarely within the EFTA.

We haven't yet seen Citibank's answer, but I assume that Citibank's legal argument is going to take a more holistic view of the wire transfer transaction: rather than a wire being three separate transactions, it will all be one unified transaction with Citi only debiting customers accounts electronically if/when a FedWire transfer happens. There's going to be a lot more to the statutory arguments made by both sides, but at core the case is going to hinge on whether a wire transfer is conceived of as only being the intermediate bank-to-bank phase of the transaction or whether it covers all phases of the transaction.

I honestly don't know how this will play out, but the UCC's legal structure for wire transfers, in which each phase involves a separate payment order, certainly creates some support for the NYAG's view, but it's also clear that each separate phase makes no sense on its own outside of the transaction as a whole, and if a phase doesn't happen the others are to be unwound. This will be a case to watch.


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