Patco Construction Company was a customer that had an account at Ocean Bank. Patco argued that its account was subject to the authorization of six fraudulent withdrawals from the account after a perpetrator supplied the correct security answers for access to Patco’s account. The perpetrator successfully wired Patco’s money to multiple individual accounts to which Patco had never before sent funds. Although Ocean Bank’s security system flagged these transactions as “unusually high risk,” given that the electronic fund transfers were inconsistent with Patco’s usual payment orders, the bank still did not notify Patco and allowed the payments, totaling \($588,851.26.\) Ocean Bank eventually recovered \($243,406.83,\) leaving a loss of \($345,444.43\) with Patco.
Patco argued that the bank should bear this loss because its security system was not “commercially reasonable” under Article 4(A) of the Uniform Commercial Code. This article of the UCC is meant to govern the rights, duties, and liabilities of banks and their customers in regard to electronic fund transfers. More specifically, Patco argued that the bank’s security system was not commercially reasonable because it failed to incorporate additional security measures such as monitoring high-risk transactions or immediately notifying customers of high-risk transactions.
On the other hand, the bank asserted that the security system was, in fact, commercially reasonable, and, because Patco agreed to the security system in use, the bank was entitled to summary judgment on all six counts of the complaint by Patco.
1. Suppose that you are a business manager at a new bank. You are determining bank policy regarding your bank’s security system. What additional components should you include in your policy to ensure that your bank meets the standards of the UCC in respect to electronic fund transfers?
2. Now suppose that you have created that policy. How would you decide to communicate this policy to your customers?