Maryland Legal Alert for Financial Services
Fourth Circuit Reaffirms Protections for Financial Institutions in ACH Fraud Case
Following the Fourth Circuit Court of Appeals' March decision in Studco Building Systems, U.S. v. 1st Advantage Federal Credit Union earlier, the court continues to reinforce protections for financial institutions in cases involving ACH transfer fraud. In a recent ruling, the Fourth Circuit denied the appellant, Studco, a request for a rehearing by the panel, despite claims that the financial institution failed to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
The appellant alleged that the financial institution did not perform adequate customer due diligence—such as verifying the account holder’s identity, address, and source of funds—as required under KYC and AML regulations. In particular, the appellant asserted that the financial institution failed to implement reasonable security procedures to detect fraudulent ACH transfers into an account held by one of its customers, as well as the subsequent disbursements to fake business entities.
Additionally, the appellant contended that the financial institution violated the National Automated Clearing House Association (NACHA) Operating Rules by accepting business-coded ACH transactions into a personal account.
The panel held that the financial institution did not have actual knowledge that the account was being used for fraudulent activity and, therefore, could not be held liable under the applicable legal framework. However, in a concurring opinion, one judge noted that the evidence suggested the financial institution may have had actual knowledge of the account misrepresentation prior to the final two transfers.
For more information, contact Tamia J. Morris.
Contact Tamia J. Morris | 410-576-4021