My apologies for yet another post arising out of Receivers of Sabena v. Deutsche Bank, but there is one more important point to be made if you’ll bear with me. (For background, here are links to the first post and the second post.)

Last week, in the second post on this subject, I talked about a transfer made by a hypothetical Sally Jones Heavy Machinery LLC which was blocked by the intermediary bank because of the SDN Listing for Sakinah Hussain a.k.a. Sally Jones. In that hypothetical, the intermediary bank’s maximum damages to Sally Jones Heavy Machinery LLC were limited to interest on the blocked funds if the bank blocked when it should not have. On the other hand, penalties to OFAC would have been up to $1 million if the bank did not block and should have. In that light, it was easy to figure out why the intermediary bank had little interest in hearing whether Sally Jones’s company and Sakinah Hussain were related.

But what if the funds transfer had been initiated by Sally Jones as an individual consumer? Would things have been different? Section 4A-108 exempts from its coverage wires covered by the Electronic Fund Transfer Act of 1978, 15 U.S.C.§ 1693. This means that wires with an individual consumer on either end, with some exceptions such as wires initiated in person at a money transfer agency, are exempted from Article 4A and are covered by the EFTA instead. So in this instance, this would mean that the liability limitations set forth in section 4A-305 would not govern the liability of the intermediary bank.

But that’s not the end of the story. Section 1693h sets forth the liability of financial institutions, and it does provide for damages that are the proximate result of a financial institutions failure to execute properly instructions received from the consumer. That, however, doesn’t cover the intermediary bank because it has not received instructions from the consumer, just instructions from the consumer’s bank. So the EFTA neither establishes nor disclaims liability. And the limitation on liability doesn’t apply.

Or does it? Look at this in the Official Comment to section 4A-108

A court might, however, apply appropriate principles from Article 4A by analogy in analyzing any part of the funds transfer that is not subject to the provisions of EFTA or other law, such as the obligation of the intermediary bank to execute the payment order of the originator’s bank (Section 4A-302)

And, of course, if a court did that (as the banks and their lawyers that drafted Section 4A clearly hope), all that the intermediary bank owes to Sally is interest on the blocked account which conveniently is sitting in that account already. So once again, it may be better to be the bank than to be Sally Jones, which probably comes as no big surprise.


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