In my post two days ago on the sad tale of Sabena Airlines and the blocked wire transfer, I focused on the rights (or lack thereof) of a beneficiary of wire that was blocked in mid-transit to recover those funds once unblocked by OFAC. Now let’s look at the other side of the coin, which is a situation that I’m sure many readers may have encountered.

Consider this hypothetical: Sally Jones, a U.S. citizen, owns Sally Jones Heavy Machinery, LLC. She asks the company’s bank, Third National Bank of Quahog, to wire $500,000 to a company in France to purchase equipment needed to fulfill a contract. Her bank initiates the wire which transits the First Bank of Paranoia in New York City. That intermediary bank blocks the transfer because it considers Sally Jones in the name of the company a hit for the SDN Listing for Sakinah Hussain a.k.a. Sally Jones. Because Sally Jones Heavy Machinery is unable to purchase the equipment in time, it winds up breaching the contract with its customer who then sues Sally Jones Heavy Machinery for a billion dollars and wins. Can Sally Jones Heavy Machinery sue the First Bank of Paranoia for a billion dollars?

The logic in the Sabena case as applied to the beneficiary of the wire also applies to the sender of the wire. The court there relied on UCC section 4A-212 which states that the “receiving bank” — in this case both the sender’s bank and the intermediary bank — has no obligation to either the sender or the beneficiary to accept a payment order without an express agreement and that no liability can arise until that payment order is accepted. Quahog Bank had an account agreement with Sally Jones Heavy Machinery and therefore may have had an obligation to accept and execute the payment order by sending it on to the First Bank of Paranoia, which it did. But the First Bank of Paranoia would not have any obligation to, or agreement with, Sally Jones Heavy Machinery and had no obligation to accept the payment order despite any protestations made by Sally Jones Heavy Equipment that it had no relation to Sakinah Hussain. As far the bank was concerned, that was an issue for OFAC to sort out, not for the bank.

But wait, can the First National Bank of Paranoia get away with this despite its arguably obvious negligence here, particularly if it refused to consider Sally Jones Heavy Equipments evidence that it was not the Sally Jones on the SDN List? Again, the court in Sabena makes clear that tort actions for negligence would not be possible and that Article 4A was intended “to be the exclusive means of determining the rights, duties and liabilities” of parties to the funds transfer.

Suppose in our example that the First National Bank of Paranoia actually accepted the payment order but then decided to block it. Would there be liability? Section 4A-305 says that there is liability for consequential damages for the failure to execute the payment order only if it agreed to pay such damages which, of course, it will not have done. Instead, the maximum liability it will have to anyone under section 4A-305(a) is to pay interest on the delay. So when OFAC ultimately decides that Sally Jones Heavy Machinery is not Sakinah Hussain, the First Bank of Paranoia will owe interest to Sally Jones Heavy Machinery. Given that blocked funds are required in any event to be in an interest bearing account this is, as they say, no skin off of Paranoia’s back.

So it’s now easy to see why the First National Bank of Paranoia was more scared of OFAC than Sally Jones. OFAC could fine the Bank one million dollars (twice the value of the transfer) if Sally Jones was Sakinah Hussain. If the bank was wrong, then its damages are equal to the amount of interest accrued on the blocked funds, interest which conveniently will be sitting in the account with the funds.


Copyright © 2016 Clif Burns. All Rights Reserved. 
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