Managing the risks of payments systems

Provides a comprehensive overview of sources of corporate risk and major control measures. Identifies risks inherent in corporate payments systems. Shows how to assess credit risk, develop policies, and control the entire risk management process.

Author Notes

Paul S. Turner practices banking and commercial law and consults
Diane B. Wunnicke is a veteran corporate finance manager and consultant

Preface	p. xiii
Chapter 1 "We Didn't Know" Is No Excuse	p. 1
What Is a Payment System?	p. 1
Payment Systems	p. 2
Liability for Fraud Losses: The Law and the Contract with the Bank	p. 3
Bank Shifting Its Statutory Liability to the Customer: Examples	p. 4
New Frontier in Cyberspace	p. 5
Chapter 2 Payment Systems Survey	p. 7
Barter	p. 7
Coins	p. 8
Paper Money	p. 8
Drafts Become Paper Money	p. 8
Notes Become Paper Money	p. 10
Evolution of Fiat Money in the United States	p. 11
New York Clearing House Association	p. 11
Check Systems	p. 14
Electronic Payments	p. 15
Fedwire	p. 15
Net Settlement Services	p. 17
CHIPS	p. 17
CHIPS Funds Transfer: Example	p. 18
ACH	p. 19
SWIFT	p. 20
Why SWIFT Is "Swift"	p. 20
How the SWIFT System Works	p. 20
Chapter 3 Checks and the Risk of Fraud	p. 23
Negotiable Instruments	p. 23
Drafts	p. 24
Check Law	p. 29
Some Definitions	p. 29
Paid and Accepted (Certified) Checks	p. 30
Bearer Paper	p. 31
Negotiation and Endorsement	p. 32
"Holder in Due Course" Doctrine	p. 32
Due Course	p. 34
Notice of Fraud or Defenses to Payment	p. 35
Risks to Others Because of the Rights of a Holder in Due Course	p. 36
Shelter Principle	p. 37
Check System in the United States	p. 38
Bank Deposits and Collections: The Depository Bank--Provisional versus Final Payment of a Check	p. 38
Payor Bank: "Final Settlement" of Presentments	p. 39
Fraud and Forgery	p. 41
Basic Rule with Respect to Fraud	p. 41
Exceptions to the Basic Rule	p. 42
Comparative Fault	p. 44
Payor Bank's Recourse against Collecting Banks	p. 45
Variation by Agreement: Warning to Treasury Managers and Their Lawyers	p. 46
Fraudulent Endorsements	p. 47
Managing Risks of the Check Payment System: Company That Issues Checks	p. 50
Internal Controls	p. 50
Bank Controls	p. 51
Check Stock	p. 52
Positive Pay Arrangements	p. 53
Company That Receives Checks	p. 55
Receipt	p. 55
Chapter 4 Wire Transfers: Originator to Its Bank to Receiving Bank	p. 59
Links in the Funds-Transfer Chain	p. 59
Originator and Its Bank	p. 61
Nonacceptance of Payment Orders	p. 62
Bank's Right to Reject Orders: Eliminate Interest Obligation	p. 63
Cancellation and Amendment of Payment Orders	p. 64
Acceptance and Execution of the Originator's Payment Order	p. 68
"Money-Back Guarantee"	p. 77
Statute of Repose	p. 79
Liability for Fraudulent Funds Transfers	p. 81
Notes for Negotiators of Funds-Transfer Agreements	p. 82
Liability for Misdescription of the Beneficiary	p. 83
Interest	p. 83
Next Link in the Funds-Transfer Chain: Sending and Receiving Banks	p. 84
Originating Company's Money-Back Guarantee	p. 86
Managing Risks in the Links of the Wire Transfer Payment System	p. 86
Originator and Its Bank	p. 86
Sending and Receiving Banks	p. 87
Study of a Bank's Perspective of Funds-Transfer Risk Management: Wire Transfer Systems Lend Money to Customers	p. 88
Why Do Banks "Lend" Money for Transfers? Intra-Day Loans	p. 88
What Is the Business Process Behind Daylight Overdrafts?	p. 89
Coping with Corporate Groups	p. 90
Handling Rejects	p. 94
Other Side of the Transfer	p. 97
Chapter 5 Wire Transfers: Completing the Transfer and Rules for Errors	p. 103
Last Link in the Funds-Transfer Chain	p. 103
Beneficiary and the Beneficiary's Bank	p. 104
Payment of the Beneficiary and Discharge of the Underlying Obligation between the Originating Company and the Beneficiary	p. 104
Managing Risks in the Links of the Wire Transfer Payment System	p. 120
Beneficiary and the Beneficiary's Bank	p. 120
Rules for Errors	p. 121
General Rule for Customer Errors	p. 121
Misdescription Errors	p. 122
Misdescription of a Bank	p. 128
Error-Detection Security Procedures	p. 130
Chapter 6 Risks of Automated Clearing House Payments	p. 141
Overview	p. 141
Definitions	p. 142
Origination of ACH Entries	p. 144
Warranties and Liabilities of the ODFI	p. 150
What Is an Indemnity?	p. 154
ACH Prenotification	p. 155
Reversing Duplicate and Erroneous Files	p. 155
Reversing Duplicate and Erroneous Entries	p. 157
Originating Destroyed Check Entries	p. 158
Reinitiation of Returned Entries to Originators	p. 159
Miscellaneous Obligations of Originators	p. 159
Receipt of Entries: RDFIs and Receives	p. 160
Receipt and Availability of Entries	p. 162
Receiver and Originator: Closing the Loop	p. 164
Returns, Changes, and Acknowledgments	p. 165
Exceptions to the Two-Banking-Day Deadline for Returns	p. 165
Refusal to Accept Returned Entries ("Dishonor")	p. 167
Notification of Change	p. 168
Acknowledgments	p. 169
Settlement and Accountability	p. 169
Security Procedures	p. 171
Settlement	p. 172
"Troubled" Sending Banks	p. 173
Cross-Border Payments	p. 174
Federal Government Payments	p. 175
Risks of the ACH Payment System	p. 177
Chapter 7 Commerce and Payments in Cyberspace	p. 185
Revolutions in Payment Systems	p. 185
Paperless Transactions and Communications	p. 186
Statute of Frauds	p. 187
Uniform Electronic Transactions Act and Electronic Signatures in Global and National Commerce Act	p. 188
Public Key Infrastructure	p. 189
Digital Signatures	p. 189
Private Keys	p. 190
Public Keys	p. 190
Certifying Authorities	p. 191
Electronic Checks	p. 191
Electronic Bill Presentment and Payment	p. 193
B2B versus B2C	p. 193
Electronic Procurement	p. 194
Smart Cards	p. 194
Purchasing Cards	p. 194
Stored Value Cards	p. 195
Money Laundering	p. 197
Privacy Rights	p. 198
Integrating Risk Management	p. 200
Chapter 8 Management of Corporate Payment Systems Risks	p. 201
Risk Management	p. 201
Transaction Risk	p. 202
Review of Contractual Risk Allocation	p. 207
Managing Payment Systems Disruptions	p. 208
Contacts	p. 209
Payments Applications	p. 209
Communications	p. 209
Managing Check Payment System Risks	p. 210
Company That Issues Checks	p. 210
Company That Receives Checks	p. 211
Managing Wire Transfer Payment System Risks	p. 212
Originator and Its Bank	p. 212
Sending and Receiving Banks	p. 213
Managing ACH Payment System Risks	p. 213
Glossary	p. 215
References	p. 225
Index	p. 227

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Summary

Author Notes

Table of Contents