International Funds Transfers

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International funds transfers

Alan L Tyree*

1 BackgroundThe international transfer of funds, like almost all payments, uses agencyrelationships to achieve the final payment. The transferor bank receives itsinstructions from the payer/customer. The instructions will always provide for adestination, usually something like account xyx with the ABC Bank. In somecases, the instructions may only name the intended payee as in For the account ofJohn Doe at ABC Bank.

Lets call the transferring bank T and the receiving bank R.

Just as in a domestic payment transaction, T is acting as agent for thepayer/customer. R is acting as agent of the payee for the purposes of receivingpayment. The special feature of an international transfer is that T will usuallyrequire the services of an overseas bank to complete the transfer.

It is not always necessary to use an overseas correspondent. If R and T are in asenior correspondent relationship, then the transfer may be a simple matter. Thetwo banks may maintain nostro and vostro accounts with each other. Theseaccounts may be used to settle the transaction, either with a credit to the vostro

account held with T or a debit to the nostro account held with R. Thenostrovostro terminology depends on the point of view. It is, obviously, notnecessary that both nostro and vostro accounts be maintained in order to effecta settlement.

Where the banks do not maintain a senior correspondent relationship, thenanother means of settlement must be found. This will involve one or morecorrespondent banks. In the simplest case, T will contact a correspondent bank Cwith which both T and R maintain a senior relationship. C will credit the accountof R and debit the account of T in order to complete the transaction.

More complex scenarios are, of course, possible and sometimes necessary, but eventhe most complex arrangement is reduced to a series of transactions of the typedescribed.

InRoyal Products Ltd v Midland Bank Ltd[1981] 2 Lloyds Rep 147, Webster Jheld that T was acting as the payers agent, C was acting as Ts agent. He rejectedan argument that C was also acting as the payers agent, but accepted that T wouldhave vicarious liability for Cs negligence.
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The distinction is important since, as is well known, an agent has a fiduciaryresponsibility to the principal. More importantly for present purposes, the agentsduty is to act strictly within the terms of his or her authority.

Devlin J, in Midland Bank Ltd v Seymour[1955] 2 Lloyds Rep 147, said (at 168):

It is a hard law sometimes which deprives an agent of the right to reimbursement if

he has exceeded his authority, even though the excess does not damage hisprincipals interests.

It is, however, sometimes difficult to determine the scope of the authority given toa paying bank.Royal Products also rejected the notion that instructions given to Tare to be subject to the doctrine of strict compliance, that is, that every part of theinstruction must be given a legal implication (per Webster J, at 199).

As an agent, T must act within its authority and perform its obligations withappropriate care and skill. Acting within its authority means

Paying the right person the right amount in a timely fashion and observing any other special instructions of the principal.

These application of these principles were at the heart of the dispute inDovey v

Bank of New Zealand[2000] 3 NZLR 641.

2 Dovey

The appellant, Mr Dovey, was a very unlucky man. He was an airline pilot whoretired from Air New Zealand in 1991. He formed the belief that the NZ dollarwould fall and that his superannuation funds would provide a better return ifinvested outside New Zealand in pounds sterling.

To achieve this aim, he instructed an officer at BNZ to transfer his funds to his

account at BCCI (Luxembourg). At the time of the instruction, Mr Dovey did nothave an account number, but had completed arrangements to open an account. Thetransfer instruction called for transfer by tested telex.

Using the SWIFT message system, BNZ instructed the Midland Bank to act on itsbehalf. BNZ held a nostro account with Midland and instructed that this accountbe debited as a means of settlement. Midland paid the amount to the NationalWestminster Bank for the account of BCCI (Luxembourg) shortly after 1am on 5July 1991 London time, and BNZ debited Mr Doveys account. At 1pm London

time, liquidators were appointed for the BCCI Group.


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Three days before accepting the transfer instruction, BNZ had suspended itsdealing limits with BCCI. This was based both on public information and oninformation from its London offices. BNZ did not suspend actual dealing withBCCI since BCCI maintained a vostro account with BNZ which was a verysubstantial sum in excess of the dealing limit. BNZ did not maintain a nostroaccount with BCCI. BNZ was well protected from any consequences of a BCCIcollapse.

None of this was conveyed to Mr Dovey.

The action alleged breach of contract in three respects:

BNZ had failed to carry out the transfer, and therefore Mr Dovey wasentitled to have his account recredited

BNZ breached its instructions by using a SWIFT transfer instead of theinstructed tested telex and BNZ should have warned Mr Dovey that BCCI was in difficulty.

2.1 The transfer

The argument that the transfer was not complete was bound to fail. There was noquestion but that the funds had reached BCCI, so the argument was that BCCI heldthe funds on its own behalf since it had not notified Mr Dovey of receipt.Alternatively, it was argued that BCCI had no authority to accept funds on behalf

of Mr Dovey.

The argument that notice might be required was based on the old case ofRekstin vSevero Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj [1933] 1KB 47. Faced with pressing creditors, funds were transferred to the account of theRussian Trade Delegation which had diplomatic immunity. The Court held that thetransfer was incomplete and that the creditors were entitled to attach the funds.

For some timeRekstins case had been explained on the grounds that the transferwas incomplete because notice had not been given to the account holder of the

receiving bank. The true explanation was given by Kerr J in Momm v BarclaysBank International[1977] QB 79: the bank held the funds on its own account sincethe Trade Delegation had not given the bank authority to receive these funds on its

behalf.

Mr Dovey, on the other hand, had conferred authority on BCCI by requesting anaccount to be opened and by providing details to the transferring bank: seeRoyal

Products Ltd v Midland Bank Ltd[1981] 2 Lloyds Rep 147. The situation issimilar to a domestic transaction where bank details are supplied to a creditor toestablish a direct credit transfer.


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2.2 SWIFT

Mr Doveys instructions called for transfer by tested telex, but the bank usedSWIFT messages. The Court found

SWIFT was the common method perhaps the only practical method ofmaking the transfer a tested telex message would have resulted in a transfer at the same time and there was nothing to show that Mr Dovey considered the tested telex to be anessential feature of the transfer.

This is primarily a matter of interpretation to determine the metes and bounds ofthe banks authority. The Courts conclusion was, in effect, that the bank actedwithin its authority. If Mr Dovey had emphasised the importance of using a

particular transfer method, then the result would be different.

2.3 Warning

The plaintiffs attempt to find an implied term that the bank was obliged to warn orinform him was probably doomed to failure. The Court considered a number ofvariations on the theme, finding that none of them met the stringent test necessaryto imply a term into the contract.

3 Australian position

How would theDovey case be decided in Australia? On the first issue, thecompletion of the transfer, I think an Australia court would have undoubtedly cometo the same conclusion as the New Zealand court. AlthoughRoyal Products has not

been considered in an Australian case, it seems likely that the agency arrangementsoutlined above would be accepted.

On the issue of SWIFT vs tested telex, the result would probably have been thesame. As noted above, the issue is one of interpretation of the instructions.

On the issue of the banks obligation to inform Mr Dovey of BCCIs position, thematter becomes more interesting.

Dovey was argued entirely on contractual principles, the plaintiff arguing that therewas an implied term that the bank should have warned of the risk. There was noconsideration

that the bank was acting as agent of Mr Dovey of any statutory obligations on the bank

of any applicable Codes of practice.


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It is not clear why there was no considerations of an agents obligation beyond thesimple banker customer contract. The other two omissions are simply a reflectionof New Zealands naive belief in the market as a protection for consumers. As aconsequence, its statutory protections are minimal and the Code of BankingPractice (in effect at the time) useless: see comments on the Australian/NewZealand comparison in the Proceedings of the Banking and Financial Services LawAssociation, available here.

In Australia, these arguments have always been intertwined with argumentsconcerning the obligations under the Trade Practices Act 1974 (TPA) and theAustralian Securities and Investments Act 2001 (ASICA). In addition, Australianow has a real (as opposed to the former Claytons) Code of Banking Practice.

There is nothing in the Code of Banking Practice which would clearly demand that

the bank disclose its information about the precarious position of BCCI. Clause2.1(b)(i) commits the bank to:

promote better informed decisions about our banking services by providing

effective disclosure of information;

A banking service means any financial service or product provided by us inAustralia to you: clause 40.

There is at least an argument that the Bank breached its obligation to promote a

better informed decision.

Clause 2.2 provides:

We will act fairly and reasonably towards you in a consistent and ethical manner.

In doing so we will consider your conduct, our conduct and the contract between

us.

This is probably not enough to carry the day for Mr Dovey, although it would beinteresting to hear the expert evidence on what is fair, reasonable and ethical

in the circumstances. Since the Code is intended to have contractual effect betweenthe bank and its customers, the clause must havesome meaning.

Mr Dovey would also try s12BC or s12CC of ASICA. One problem is to determinewhich section applies. Both prohibit unconscionable conduct in certaincircumstances involving the supply of financial services. Section 12CB(5) statesthat:

(5) A reference in this section to financial services is a reference to financial

services of a kind ordinarily acquired for personal, domestic or household use.
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It seems reasonable to conclude that the international transfer of nearlyNZ$750,000 and its conversion to a different currency is not such a service.

The application of s12CC is limited by ss(6):

a reference in this section to the supply or possible supply of financial services is

a reference to the supply or possible supply of financial services to a person whose

acquisition or possible acquisition of the financial services is or would be for thepurpose of trade or commerce.

Mr Dovey acquired the financial service as a means to make professionalinvestments. It is at least arguable that it was done for the purposes of trade orcommerce.

Section 12CC(2) gives a non-exclusive shopping list of matters which the courtmay consider in determining if the supplier has engaged in conduct which wasunconscionable. Most interesting is s12CC(3)(g) and (i):

(g) if the person is a corporationthe requirements of any applicable industry code

(i) the extent to which the supplier unreasonably failed to disclose to the servicerecipient: (i) any intended conduct of the supplier that might affect the interests of

the service recipient; and (ii) any risks to the service recipient arising from the

suppliers intended conduct (being risks that the supplier should have foreseen

would not be apparent to the service recipient)

So, should the bank have disclosed the BCCI risks to Mr Dovey? The answer iscertainly not completely apparent. To succeed, Mr Dovey would need to show thatthe risks arose from the banks intended conduct which could possibly be theintended SWIFT transfer to BCCI. Without that conduct there would have not

been the risk to Mr Doveys funds, so it could be said that the risk arose from theintended conduct.

The various matters in s12CC(2) are not to be read in isolation. It could be arguedthat the combination of ss(g) and ss(i) together with clause 2.2 of the Code ofBanking Practice impose a duty to disclose the known risk.

4 Conclusions

The obligations on an ADI who undertakes an international transfer of funds hasnot been considered in an Australian case.

One Australian case deals with the obligations of a receiving bank in a domestic

transfer, at least when the transferring bank and the receiving bank are the same.InNemur Varity Pty Ltd v National Australia Bank Limited & Anor[1999] VSC


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342; [2002] VSCA 18, the plaintiff ordered a telegraphic transfer. The order wasambiguous in that it stated the name of the intended payee correctly, but providedan incorrect account number. The transfer was made to a fraudulent third party whohad provided the account number.

Ashley J held that the bank owed its customer a duty to be reasonably sure that thetransfer was made to the correct account. On the evidence, he held that a reasonable

banker would have made inquiries and that those inquiries would have shown thediscrepancy between the named payee and the account number.

This point was not disturbed by the Court of Appeal. However, the evidence in thecase was unsatisfactory since the bank led no evidence on the issue. In thosecircumstances, Batt JA noted that not surprisingly the judge found that the bankhad been in breach of its duty in making the telegraphic transfer.

While it is clear that there is an obligation to follow instructions the variousmethods used and problems encountered make the problem more complex thanthose encountered in a simple domestic payment.Dovey v Bank of New

Zealand[2000] 3 NZLR 641 shows that there may be more to the matter thansimple bankercustomer contractual issues.

References

*Consultant; formerly Landerer Professor of Information Technology andLaw, University of Sydney. The views expressed are my own and do notnecessarily reflect the views of any other person or organisation.

Return to Alan's Home Page.

Please send inquiries & questions toAlan L Tyree.

This document was translated from LATEX byHEVEA.

Creation of Bank Accounts (Vostro/Nostro)

Purpose

Bank accounts are those current accounts that banks manage among themselves. One of the banks isthe account holder and the other bank is the account manager. The account manager manages theaccount of the correspondent bank as a vostro account and the account holder manages the offsettingaccount as a nostro account.

The vostro account is the account for which the bank statements are created and sent to the otherbank by the account managing bank. The account managing bank creates the original settlementcalculation and the offsetting calculation is mirrored on the nostro account of the correspondent bank.
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Prerequisites

There has to be a product of the category Bank accountbefore you can create the bank accounts.

You define this product (as all other products) using the Product Configurator.

Do this in the Implementation Guide (IMG) by

choosing Master dataProduct definition.

Create a product.

Under feature, choose Special account type, and choosebank account.

Define the product of the category bank account inaccordance with your requirements.

Process flow

1. ChooseAccountCreate and enter the data on the initial screen. As product, enter a product

of the category Bank account.

On the "Basic data" screen in the section "Administration" you can see if the account is avostro or a nostro account (depending on your default settings in Customizing, the accountyou create is either a vostro or a nostro account).

If you wish to change the bank account category (default value is a vostro account and youwish to create a nostro account), in the section "Administration" choose the time breakdownicon and enter the bank account category you require. Prerequisite for this is that you havealready made an entry in the business partner field.

2. Enter the other data for this account.


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You enter the bank account data in the same way as for customer accounts.

Result

The bank account has been successfully created. The process for changing the account management

is described underChange in Account Management.

Note:

It is not absolutely necessary to execute account balancing for a nostro account.However, you can execute the balancing for the purpose of controlling the balancingperformed by the other bank. The following special features apply:

Credit interest is calculated for debit balances.

Debit or overdraft interest is calculated for credit balances.

The balancing results determined during account balancing

are not posted, as these are posted into the current accountsystem from external payment transactions or manually.

Note that nostro account reconciliation is not included in the current account system.
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International Funds Transfers

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