INDUSTRY COMMENT Computer fraud has greatly increased risks for Australian banks Frank Rees A ccording to a major Australian law firm, Minter Ellison, "Computer fraud and electronic funds transfers have greatly increased the risks of banks making and receiving mistaken payments", and banks must be aware of the risks of dealing with money received by mistake. If the mistake is genuine and action is taken promptly then the law will assist the bank making the mistaken payment, but it will not allow the recipient to be "unjustly enriched". To illustrate these principles Minter Ellison cite the case of ANZ Banking Group Ltd v Westpac Banking Corp. (1988) in which ANZ mistakenly transferred AS100 000 electronically to a Westpac customer's account. Minter Ellison reports, "The Court held that ANZ was entitled to recover the mistaken payment except for what had been paid out by Westpac to its customer before learning of the mistake. But from the recipient bank's point of view, it is important that if money is paid out before the claim for repayment is made, the payment out is consistent with the circumstances in which it was received. In the Westpac case, this was so because the money was transferred to an account of a Westpac customer and paid out to that customer." However, there was a different outcome in the case of State Bank of New South Wales v Swiss Bank Corp. (8 September 1995) which involved fraud. The New South Wales Court of Appeal found that the recipient when disbursing the mistaken payment had not acted consistently with the circumstances in which it was received. Consequently, it had no protection, and had to repay from its own funds the amount it had paid away. Minter Ellison comments, "The Swiss Bank case involved a fraud. Swiss Bank was led to mistakenly make an electronic transfer of A$20 million to the State Bank. Because of false computer entries, Swiss Bank thought that it was repaying a deposit placed with it by State Bank. The money was received by State Bank which innocently thought that it was part of a refinancing transaction of one of its customers (who had also acted innocently). State Bank therefore disbursed the funds on account of that customer. "electronic funds transfers have greatly increased the risks of banks making and receiving mistaken payments" "It might have been expected that, like the Westpac case, the Court would not require repayment of the amount disbursed by State Bank before it learned of the mistake. But the Court found an important difference. Swiss Bank did not send the funds to the account of State Bank's customer. When the funds were received, State Bank believed they were for its customer. But nothing that Swiss Bank had done justified State Bank's belief and its decision to disburse the money. Rather, State Bank paid the money away because its customer had told it to expect the funds as part of the refinancing transaction." Australian financial institutions can take heart that the law provides a remedy when money is innocently paid over by mistake, said the law firm. But where they are the receiving party, particularly where funds are received electronically and in unclear circumstances, they must be cautious before paying the money away. "Swiss Bank was led to mistakenly make an electronic transfer of A$20 million" 18 Computer Fraud &Security March1996 © 1996 Elsevier Science Ltd

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Page 1: Computer fraud has greatly increased risks for Australian bansk

INDUSTRY COMMENT

Computer fraud has greatly increased risks for Australian banks

Frank Rees

A ccording to a major Australian law firm, Minter Ell ison, "Computer fraud and

e l e c t r o n i c f u n d s t r a n s f e r s have great ly increased the risks of banks making and receiving mistaken payments", and banks must be aware of the risks of dealing with money received by mistake. If the mistake is genuine and action is taken promptly then the law will assist the bank making the mistaken payment, but it will not allow the recipient to be "unjustly enriched". To illustrate these principles Minter Ellison cite the case of ANZ Banking Group Ltd v Westpac Banking Corp. (1988) in which ANZ mistakenly transferred AS100 000 electronically to a Westpac customer's account.

Minter Ellison reports, "The Court held that ANZ was entitled to recover the mistaken payment except for what had been paid out by Westpac to its customer before learning of the mistake. But from the recipient bank's point of view, it is important that if money is paid out before the claim for repayment is made, the payment out is consistent with the circumstances in which it was received. In the Westpac case, this was so because the money was transferred to an account of a Westpac customer and paid out to that customer."

However, there was a different outcome in the case of State Bank of New South Wales v Swiss Bank Corp. (8 September 1995) which involved fraud. The New South Wales Court of Appeal found that the recipient when disbursing the mistaken payment had not

acted consistently with the circumstances in which it was received. Consequently, it had no protection, and had to repay from its own funds the amount it had paid away.

Minter Ellison comments, "The Swiss Bank case involved a fraud. Swiss Bank was led to mistakenly make an electronic t r a n s f e r o f A$20 million to the State Bank. Because of f a l se c o m p u t e r entries, Swiss Bank thought that it was repaying a deposit p laced with it by S ta te Bank. The money was received by State Bank which innocently thought that it was part of a r e f i n a n c i n g transaction of one of its customers (who had also acted innocently). State Bank therefore disbursed the funds on account of that customer.

"electronic funds transfers have greatly increased the risks of banks making and receiving mistaken payments"

"It might have been expected that, like the Westpac case, the Court would not require repayment of the amount disbursed by State Bank before it learned of the mistake. But the Court found an important difference. Swiss Bank did not send the funds to the accoun t of S ta te B a n k ' s cus tomer . When the funds were received, State Bank believed they were for its customer. But nothing that Swiss B a n k had done justified State Bank's belief and its decision to disburse the money. Rather, State Bank paid the money away because its customer had told it to expect the funds as part of the refinancing transaction."

Australian financial institutions can take heart that the law provides a remedy when money is innocently paid over by mistake, said the law firm. But where they are the receiving party, particularly where funds are received electronically and in unclear circumstances, they must be cautious before paying the money away.

"Swiss Bank was led to mistakenly make an electronic transfer of A$20 million"