Allocation of Loss Due to Fraudulent Wholesale Wire Transfers: Is There a Negligence Action against a Beneficiary's Bank after Article 4A of the Uniform Commercial Code?

The importance of wire transfers will grow tremendously as electronic banking eclipses paper mechanisms. Article 4A of the Uniform Commercial Code (UCC) was meant to solve the problem of no laws for the rights and obligations of the parties to a wire transfer. Article 4A, however, inadequately determines liability in cases where a bank negligently honors a fraudulent wire transfer. Depending on the court's interpretation, Article 4A either leaves liability uncertain or compels an innocent party to pay. It is argued that where a bank reasonably should have known of a fraud but still pays out a wire transfer to an unauthorized recipient, common law negligence should provide a basis for recovery despite the absence of an explicit Code provision imposing liability on the bank. Article 4A should not displace negligence as a cause of action because a negligence claim will prevent inequity and promote efficiency without unduly frustrating Code policies.