How to Stop Fraudulent Money Transfers

Oh No! Money has been sent to a fraudster and we need to stop it

In a recent movie, the Beekeeper, an elderly woman is conned into logging into numerous on-line bank and financial institution accounts and the accounts are drained via wire transfers to the fraudsters. Similarly, the headlines are rife with reports of individuals being defrauded through fraudsters hijacking money transfers via e-mail through changed payment instructions to send payment. What can be done once a fraudulent transfer has been initiated to stop the transaction? The answer is that it depends on how the money transfer is being done.

Typical Money Transfer Options

Typical ways a company might send money are company check, cashier’s check, wire transfer, automated clearing house (ACH) transaction, Venmo®, or Zelle®. What recourse may be available to the company depends on what method is used:

• Company check: Prior to a check being cashed, the company can contact their bank and request a stop payment on the check. Generally, state law provides that if a sender makes a stop-payment request in time and in writing, the recipient bank or credit union will not be able to cash the check for six months. If a recipient bank or credit union cashes the check nonetheless, it, not the company, will be responsible for the payment.
• Cashier’s Check: A company cannot generally stop payment on a cashier’s check because it is a check drawn on the bank, not the individual account holder.
• Wire Transfer: Whether a wire transfer can be stopped depends on whether the wire transfer is to a domestic or foreign bank.
• Domestic Wire Transfer: Generally, a wire transfer to a domestic bank cannot be recalled once the wire transfer has been initiated. There is generally a slight lag from the time that a wire transfer is requested and it is initiated and the company may be able to stop the wire transfer before it is initiated depending on the sending financial institution’s policies.
• International Wire Transfer: If the wire transfer is to a foreign bank, there are two options. First, a sender will typically have up to 30 minutes to cancel the remittance transfer at no charge, unless the transfer has already been picked up or deposited into the recipient’s account. If a SWIFT payment is still in progress, in cases involving fraudulent payments, the sender can take action by initiating a recall notice. SWIFT allows for payments to be halted and funds to be retrieved by the sender. This intervention takes place within the SWIFT network, effectively stopping any further processing of the payment. Second, the FBI offers a Financial Fraud Kill Chain (FFKC) process to help recover large international wire transfers stolen from the United States. The FFKC is intended to be utilized as another potential avenue for U.S. financial institutions to get victim funds returned. Normal bank procedures to recover fraudulent funds should also be conducted. The FFKC can only be implemented if the fraudulent wire transfer meets the following criteria:
• the wire transfer is $50,000 or above
• the wire transfer is international
• a SWIFT recall notice has been initiated
• the wire transfer has occurred within the last 72 hours.
• ACH Transfer: Companies who mistakenly send ACH transfers can generally stop or reverse them. However, the company needs to act quickly. The ACH transfer could be debited as early as the next business day, so it is important to quickly act if an ACH payment was made in error. As an additional safeguard, a business account holder can set up an ACH debit block to prevent any electronic withdrawals from an account.
• Venmo ®: Generally, Venmo transactions cannot be stopped once initiated.
• Zelle ®: Zelle® payments cannot be reversed. Zelle® money moves into an enrolled recipient’s account within minutes and cannot be reversed. If a company used its Zelle account to send money to an impostor, it may be possible to have the transfer reversed. The process would be to file a claim with Zelle and the company’s bank or credit union. Zelle has indicated that it is reversing charges, but each claim will be approved on a case-by-case basis.

How Fraudsters Insert Themselves in Transactions

There are many ways in which a fraudster might get involved in a transaction. For example, the fraudster could directly contact the company and request the money — or that the money be transferred into some account. This is what is typically happening in individual frauds, such as the pig butchering type of fraud. Generally, the remedies for the transfer will be what is outlined above.

Another way that a fraudster could trick a victim is to send new payment instructions for an existing transaction or vendor. For example, a fraudster could send new payment instructions for an existing vendor to which the company does business. Or the fraudster could impersonate an escrow agent to give new payment instructions for the payment for real estate. In these situations, another possible avenue is available to the victim. The victim may file a lawsuit against the vendor seeking to have the payment credited with the vendor even though it was made to the fraudster. Whether this avenue will be successful is very fact dependent. Many states have adopted a principal that the last person who could have stopped the transaction is responsible for the transaction. In a recent Texas case, Benchellal v. The Okonite Co., Inc., №4:22-CV-04435 (S.D. Tex. Mar. 11, 2024), the victim failed to call the vendor to confirm the changed wiring instructions. As a result, the victim was deemed to be the person who was in the best position to stop the fraud and thus had no remedy against the payee for the fraud.

Key Takeaways to Prevent Payment Fraud:

• If payment by a company check is possible, it is the best avenue as it has the most safeguards in place and the longest timeframe in which to stop the transaction. Since checks are generally sent via the United States Postal Service or through overnight, there is generally a lag from the payment being sent to when it becomes irreversible. Of course, this assumes that the fraud is discovered quickly — e.g., before the check is cashed.
• If a company check is not possible, the next best way to send money is via ACH transfer. Since this method allows for a lag between the initiation and the receipt — in some cases 24 hours or more, this gives the company time to stop the transfer. For example, in the case of the kind of fraud initiated in the Beekeeper, the victim would have had time to stop the ACH transfer whereas with a wire she could not stop it once initiated.
• Always use a second method to confirm any payments — especially if there is a recent change in the payment instructions. Companies should set up a system to both periodically check the payment instructions of each vendor and to use a second method of confirming any recent changes in payment instructions. The best way is not to use anything that is referenced in the new payment instructions, but rather to resort to the original payment instructions — including the original contact. Preferably, the contact should be by a call to the number that the vendor used to set up the account — not one that is associated with the new payment instructions. This would include for any wire transfers that two persons authorization be required for any wire transfer.
• Companies should educate their employees on payment frauds and should be on the lookout for changed payment instructions. An additional safeguard might be to have two separate employees be involved in any change of payment instructions to make sure that the new payment instructions are valid.

For more information about fraud litigation and commercial litigation, see our business litigation practice page.

Klemchuk PLLC is a leading IP law firm based in Dallas, Texas, focusing on litigation, anti-counterfeiting, trademarks, patents, and business law. Our experienced attorneys assist clients in safeguarding innovation and expanding market share through strategic investments in intellectual property.

This article is provided for informational purposes only and does not constitute legal advice. For guidance on specific legal matters under federal, state, or local laws, please consult with our IP Lawyers.

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Originally published at https://www.klemchuk.com on August 2, 2024.