Banks say court's ‘novel' ruling upends wire transfer business
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A New York federal court's recent ruling that a wire transfer can be cleaved into component parts – with consumer transfers subject to the Electronic Funds Transfer Act – has alarmed banks, which are seeking a quick review by a federal appeals court.
The banks argue the court's finding that consumer-initiated transfers fall within the EFTA, and not a less-stringent regulation they've been using, introduces uncertainty that could require costly changes to their operations or cause banks to restrict consumers' access to online wire transfers.
District Judge J. Paul Oetken ruled Jan. 21 on Citibank's motion to dismiss the complaint filed last year by New York Attorney General Letitia James. He granted parts of the motion, but upheld the state's view that the EFTA covers consumer wire transfers that use a bank's electronic platform.
Citibank and a half dozen industry groups have asked Oetken to allow for a review of his ruling and central questions of law in the case before it proceeds further. Oetken has set an initial conference for March 13, according to court documents.
Banks have operated for decades under what the industry's brief calls a 'settled legal regime' that wire transfers do not fall under the EFTA's purview. That law, for one thing, would impose greater regulatory burdens and costs on the industry.
'The Act specifically requires financial institutions to provide lengthy written disclosures to certain customers, investigate and resolve allegedly unauthorized electronic fund transfers, and, in many instances, assume liability for the bulk of consumer losses stemming from such unauthorized transactions,' attorneys at the law firm Katten wrote last month in a client advisory.
The New York AG sued Citibank in Jan. 2024, alleging that the bank failed to impose robust data security and anti-breach practices, costing bank customers millions of dollars in losses to fraudsters. The bank also had inadequate monitoring systems and did not properly investigate fraud claims or respond quickly to customer complaints, according to the lawsuit.
The suit seeks to collect restitution for fraud victims over six years, penalties and disgorgement. The Consumer Financial Protection Bureau filed a brief last May supporting the state's legal position.
Wire transfers involve a financial institution sending funds to another financial institution on a wire network like Fedwire or the Clearing House Interbank Payments System (CHIPS), unlike traditional electronic fund transfers to or from a customer account, the Katten lawyers wrote.
Citibank and its peers argue that the EFTA doesn't apply because of a provision within the Uniform Commercial Code, Article 4A, governing wire transfers.
The court's finding 'would require banks to upend their wire-transfer programs or risk additional legal liability for the thousands of consumer wire transfers that they execute every day,' Citibank said in its Feb. 18 motion for appellate review. 'At a minimum, appellate guidance is warranted before Citibank and the entire financial-services industry are forced to make such a drastic change based on the NYAG's novel reading of the statute.'
The 1978 EFTA limits consumer liability for unauthorized electronic fund transfers to $500 or less if a customer notifies their financial institution of the suspect transaction within 60 days.
In his order, Oetken agreed with the state's contention that a wire transfer is composed of three separate and independent fund transfers, including the consumer's initial instruction on a bank's electronic platform to transfer funds from his or her account.
The case holds 'profound consequences for an industry that has organized around what has been understood for decades to be a settled legal regime,' six banking industry groups wrote Feb. 25 in their amicus brief, supporting Citibank's effort to have the district court allow an immediate appeal to the Second Circuit. 'The Court's decision has prompted significant uncertainty and will impose steep costs on Amici's members as they consider whether and how to reorganize their online funds transfer offerings in the face of precedent that now conflicts across jurisdictions.'
Banks will face further costs if the court's view is reversed 'years from now' on appeal, according to the brief, whose filers include the American Banking Association, the Clearing House Association and the New York Bankers Association.
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