1) The U.C.C.
3) Federal Reserve Board Regulation E
§ 205.6 Liability of consumer for unauthorized transfers.
4) Federal Reserve Board Regulation Z
§ 226.12 Special credit card provisions.
The Bank Secrecy Act of 1970
Know your customer
7) Conclusion
by Kevin Holst
1)
The U.C.C.- The Uniform
Commercial Code, particularly Articles 3 and 4, regulate payment
system legislation. They generally focus on non-electronic transfers
of money, but are the best link to be drawn from the past. Under
Article 3, no person is liable on an instrument unless his signature
or that of a representative appears on the instrument, or unless he
subsequently ratifies. In this system the recipient assumes most of
the burden in the case of a forged document. Article 3 also
establishes the principals of negotiability, where protection permits
negotiable instruments to be accepted in trade without detailed
inquiry into the business transaction that gave rise to the
instrument.
[Note that under recent legislation, digital signatures count as signatures, so presumably ecash note that were digitally signed would fit this rule. DF]
2) U.C.C. Article 4(a)- This section of the Uniform Commercial Code deals with electronic transfers. It addresses the problem of not knowing with certainty the identity of the person on the other end of the transaction. It provides that an unauthorized signature may be depended on when there are satisfactory prearranged procedures that have been followed for identification. This stepped away from the paper based world of Article 3, and allowed some security in the digital world. This exception does not currently apply to most consumer payments, so any further legislation on digital cash would have to specifically reference 4(a).
3) Federal Reserve Board Regulation E- Reg E establishes the basic rights, liabilities, and responsibilities of consumers who use electronic money transfer services and of financial institutions that offer these services. It shifts the burden of proof to the financial institution to show that the transaction was authorized.
12 CFR 205.6
§ 205.6 Liability of consumer for
unauthorized transfers.
(a) Conditions for liability. A consumer may be held liable, within
the limitations described in paragraph (b) of this section, for an
unauthorized electronic fund transfer involving the consumer's
account only if the financial institution has provided the
disclosures required by § 205.7(b)(1), (2), and (3). If the
unauthorized transfer involved an access device, it must be an
accepted access device and the financial institution must have
provided a means to identify the consumer to whom it was issued.
(b) Limitations on amount of liability. A consumer's liability for an
unauthorized electronic fund transfer or a series of related
unauthorized transfers shall be determined as follows:
(1) Timely notice given. If the consumer notifies the financial
institution within two business days after learning of the loss or
theft of the access device, the consumer's liability shall not exceed
the lesser of $ 50 or the amount of unauthorized transfers that occur
before notice to the financial institution.
(2) Timely notice not given. If the consumer fails to notify the
financial institution within two business days after learning of the
loss or theft of the access device, the consumer's liability shall
not exceed the lesser of $ 500 or the sum of:
(i) $ 50 or the amount of unauthorized transfers that occur within
the two business days, whichever is less; and
(ii) The amount of unauthorized transfers that occur after the close
of two business days and before notice to the institution, provided
the institution establishes that these transfers would not have
occurred had the consumer notified the institution within that
two-day period.
(3) Periodic statement; timely notice not given. A consumer must
report an unauthorized electronic fund transfer that appears on a
periodic statement within 60 days of the financial institution's
transmittal of the statement to avoid liability for subsequent
transfers. If the consumer fails to do so, the consumer's liability
shall not exceed the amount of the unauthorized transfers that occur
after the close of the 60 days and before notice to the institution,
and that the institution establishes would not have occurred had the
consumer notified the institution within the 60-day period. When an
access device is involved in the unauthorized transfer, the consumer
may be liable for other amounts set forth in paragraphs (b)(1) or
(b)(2) of this section, as applicable.
(4) Extension of time limits. If the consumer's delay in notifying
the financial institution was due to extenuating circumstances, the
institution shall extend the times specified above to a reasonable
period.
(5) Notice to financial institution. (i) Notice to a financial
institution is given when a consumer takes steps reasonably necessary
to provide the institution with the pertinent information, whether or
not a particular employee or agent of the institution actually
receives the information.
(ii) The consumer may notify the institution in person, by telephone,
or in writing.
(iii) Written notice is considered given at the time the consumer
mails the notice or delivers it for transmission to the institution
by any other usual means. Notice may be considered constructively
given when the institution becomes a
ware of circumstances leading to
the reasonable belief that an unauthorized transfer to or from the
consumer's account has been or may be made.
(6) Liability under state law or agreement. If state law or an
agreement between the consumer and the financial institution imposes
less liability than is provided by this section, the consumer's
liability shall not exceed the amount imposed under the state law or
agreement.
4)
Federal Reserve Board Regulation Z- Regulation Z
governs credit card transactions, including the issuance and
liabilities of both parties. Of particular interest to the digital
cash debate is the unauthorized use, which may apply if the monetary
supply shifts away from the federal government to place
responsibility in the hands of those legitimizing the currency.
12 CFR 226.12
§ 226.12 Special credit card
provisions.
(a) Issuance of credit cards. Regardless of the purpose for which a
credit card is to be used, including business, commercial, or
agricultural use, no credit card shall be issued to any person
except:
(1) In response to an oral or written request or application for the
card; or
(2) As a renewal of, or substitute for, an accepted credit card.
For purposes of this
section, accepted credit card means any credit card that a cardholder
has requested or applied for and received, or has signed, used, or
authorized another person to use to obtain credit. Any credit card
issued as a renewal or substitute in accordance with this paragraph
becomes an accepted credit card when received by the cardholder.
(b) Liability of cardholder for unauthorized use -- (1) Limitation on
amount. The liability of a cardholder for unauthorized use of a
credit card shall not exceed the lesser of $ 50 or the amount of
money, property, labor, or services obtained by the unauthorized use
before notification to the card issuer under paragraph (b)(3) of this
section.
Unauthorized use means
the use of a credit card by a person, other than the cardholder, who
does not have actual, implied, or apparent authority for such use,
and from which the cardholder receives no benefit.
(2) Conditions of liability. A cardholder shall be liable for
unauthorized use of a credit card only if:
(i) The credit card is an accepted credit card;
(ii) The card issuer has provided adequate notice of the cardholder's
maximum potential liability and of means by which the card issuer may
be notified of loss or theft of the card. The notice shall state that
the cardholder's liability shall not exceed $ 50 (or any lesser
amount) and that the cardholder may give oral or written
notification, and shall describe a means of notification (for
example, a telephone number, an address, or both); and
Adequate notice means a
printed notice to a cardholder that sets forth clearly the pertinent
facts so that the cardholder may reasonably be expected to have
noticed it and understood its meaning. The notice may be given by any
means reasonably assuring receipt by the cardholder.
(iii) The card issuer has provided a means to identify the cardholder
on the account or the authorized user of the card.
(3) Notification to card issuer. Notification to a card issuer is
given when steps have been taken as may be reasonably required in the
ordinary course of business to provide the card issuer with the
pertinent information about the loss, theft, or possible unauthorized
use of a credit card, regardless of whether any particular officer,
employee, or agent of the card issuer does, in fact, receive the
information. Notification may be given, at the option of the person
giving it, in person, by telephone, or in writing. Notification in
writing is considered given at the time of receipt or, whether or not
received, at the expiration of the time ordinarily required for
transmission, whichever is earlier.
(4) Effect of other applicable law or agreement. If state law or an
agreement between a cardholder and the card issuer imposes lesser
liability than that provided in this paragraph, the lesser liability
shall govern.
(5) Business use of credit cards. If 10 or more credit cards are
issued by one card issuer for use by the employees of an
organization, this section does not prohibit the card issuer and the
organization from agreeing to liability for unauthorized use without
regard to this section. However, liability for unauthorized use may
be imposed on an employee of the organization, by either the card
issuer or the organization, only in accordance with this section.
(c) Right of cardholder to assert claims or defenses against card
issuer -- (1) General rule. When a person who honors a credit card
fails to resolve satisfactorily a dispute as to property or services
purchased with the credit card in a consumer credit transaction, the
cardholder may assert against the card issuer all claims (other than
tort claims) and defenses arising out of the transaction and relating
to the failure to resolve the dispute. The cardholder may withhold
payment up to the amount of credit outstanding for the property or
services that gave rise to the dispute and any finance or other
charges imposed on that amount.
This paragraph does not
apply to the use of a check guarantee card or a debit card in
connection with an overdraft credit plan, or to a check guarantee
card used in connection with cash advance checks.
The amount of the claim
or defense that the cardholder may assert shall not exceed the amount
of credit outstanding for the disputed transaction at the time the
cardholder first notifies the card issuer or the person honoring the
credit card of the existence of the claim or defense. To determine
the amount of credit outstanding for purposes of this section,
payments and other credits shall be applied to: (1) Late charges in
the order of entry to the account; then to (2) finance charges in the
order of entry to the account; and then to (3) any other debits in
the order of entry to the account. If more than one item is included
in a single extension of credit, credits are to be distributed pro
rata according to prices and applicable taxes.
(2) Adverse credit reports prohibited. If, in accordance with
paragraph (c)(1) of this section, the cardholder withholds payment of
the amount of credit outstanding for the disputed transaction, the
card issuer shall not report that amount as delinquent until the
dispute is settled or judgment is rendered.
(3) Limitations. The rights stated in paragraphs (c)(1) and (2) of
this section apply only if:
(i) The cardholder has made a good faith attempt to resolve the
dispute with the person honoring the credit card; and
(ii) The amount of credit extended to obtain the property or services
that result in the assertion of the claim or defense by the
cardholder exceeds $ 50, and the disputed transaction occurred in the
same state as the cardholder's current designated address or, if not
within the same state, within 100 miles from that address.
The limitations stated
in paragraph (c)(3)(ii) of this section shall not apply when the
person honoring the credit card: (1) Is the same person as the card
issuer; (2) is controlled by the card issuer directly or indirectly;
(3) is under the direct or indirect control of a third person that
also directly or indirectly controls the card issuer; (4) controls
the card issuer directly or indirectly; (5) is a franchised dealer in
the card issuer's products or services; or (6) has obtained the order
for the disputed transaction through a mail solicitation made or
participated in by the card issuer.
(d) Offsets by card issuer prohibited. (1) A card issuer may not take
any action, either before or after termination of credit card
privileges, to offset a cardholder's indebtedness arising from a
consumer credit transaction under the relevant credit card plan
against funds of the cardholder held on deposit with the card
issuer.
(2) This paragraph does not alter or affect the right of a card
issuer acting under state or Federal law to do any of the following
with regard to funds of a cardholder held on deposit with the card
issuer if the same procedure is constitutionally available to
creditors generally: obtain or enforce a consensual security interest
in the funds; attach or otherwise levy upon the funds; or obtain or
enforce a court order relating to the funds.
(3) This paragraph does not prohibit a plan, if authorized in writing
by the cardholder, under which the card issuer may periodically
deduct all or part of the cardholder's credit card debt from a
deposit account held with the card issuer (subject to the limitations
in § 226.13(d)(1)).
(e) Prompt notification of returns and crediting of refunds. (1) When
a creditor other than the card issuer accepts the return of property
or forgives a debt for services that is to be reflected as a credit
to the consumer's credit card account, that creditor shall, within 7
business days from accepting the return or forgiving the debt,
transmit a credit statement to the card issuer through the card
issuer's normal channels for credit statements.
(2) The card issuer shall, within 3 business days from receipt of a
credit statement, credit the consumer's account with the amount of
the refund.
(3) If a creditor other than a card issuer routinely gives cash
refunds to consumers paying in cash, the creditor shall also give
credit or cash refunds to consumers using credit cards, unless it
discloses at the time the transaction is consummated that credit or
cash refunds for returns are not given. This section does not require
refunds for returns nor does it prohibit refunds in kind.
(f) Discounts; tie-in arrangements. No card issuer may, by contract
or otherwise:
(1) Prohibit any person who honors a credit card from offering a
discount to a consumer to induce the consumer to pay by cash, check,
or similar means rather than by use of a credit card or its
underlying account for the purchase of property or services; or
(2) Require any person who honors the card issuer's credit card to
open or maintain any account or obtain any other service not
essential to the operation of the credit card plan from the card
issuer or any other person, as a condition of participation in a
credit card plan. If maintenance of an account for clearing purposes
is determined to be essential to the operation of the credit card
plan, it may be required only if no service charges or minimum
balance requirements are imposed.
(g) Relation to Electronic Fund Transfer Act and Regulation E. For
guidance on whether Regulation Z (12 CFR part 226) or Regulation E
(12 CFR part 205) applies in instances involving both credit and
electronic fund transfer aspects, refer to Regulation E, 12 CFR
205.12(a) regarding issuance and liability for unauthorized use. On
matters other than issuance and liability, this section applies to
the credit aspects of combined credit/electronic fund transfer
transactions, as applicable.
The
Bank Secrecy Act of 1970 (BSA) "imposes record keeping and
reporting requirements on financial institutions in order to supply
law enforcement with evidence of financial transactions." It
basically sets up a required “paper trial” to assist in
the prosecution of tax evaders or other criminals. The
Money Laundering Control Act of 1986 precludes
circumvention of the BSA requirements by creating criminal liability
for individuals who conduct monetary transactions knowing, or with
reason to know, that the proceeds involved were obtained from
unlawful activity. Increasing the liability, both criminally and
civilly can often serve as a deterrence. The
Money Laundering Suppression Act of 1994 (MLSA), which amended
the BSA, mandates a liberalization of the "rules for exemption of
transactions from the currency transaction reporting requirement, in
an effort to reduce the number of Currency Transaction Report (CTR)
forms filed by at least 30%." Additionally, the MLSA allows the
Department of Treasury to determine which agency will be the sole
entity to receive reports of suspicious transactions from financial
institutions. And finally, the MLSA requires "all money transmitting
businesses" to register with the Treasury.
The
105th Congress attempted to add
foreign banking institutions to current money laundering laws, but
was unsuccessful due to opposition from the International Banking
Community. They felt that the extension of US law that would subject
"any foreign bank doing business in the United States to the full
range of record keeping requirements currently imposed under the Bank
Secrecy Act, Federal Deposit Insurance Act, and Title I of Public Law
508, with respect to its transactions in U.S. dollars." would cause
undue hardship on non-United States customers of the bank trying to
do business in US dollars. No word on how this would be applied to
money that did not belong to the US.
Another
proposal is the Know Your Customer
regulations, which would require banking institutions to know their
customer’s activities and report any deviations which seem
suspicious. Many banks
already have such systems in place, but these regulations would set a
common standard for financial institutions. This proposal would
greatly reduce the ability of criminals to launder money, but would
again, be at the cost of added loss of privacy.
Useful
websites on money laundering include;
http://www.occ.treas.gov/launder/orig1.htm
http://www.treas.gov/fincen/border.html
Future
laws regarding digital cash will be dependent on how “anonymous”
the federal government allows digital cash to be. Currently, both
banking institutions and credit card companies are governed by
certain rules that require them to report to both customers and the
government certain aspects of their business. The liability is
carefully placed, with partial accountability placed on the consumer
and partial accountability on the financial provider to insure that
both parties have an interest in keeping the environment safe for
advance technologies. For example, the credit card company has the
burden of proving the transaction took place before they can recover
from the customer. A similar requirement for the providers of a
digital cash would greatly reduce fraud, but would also put privacy
at risk. The federal government protects banks and their customers
from unfortunate circumstances in exchange for the banks providing
certain information about large cash transactions. As with many other
issues, security comes with the decrease in privacy. What balance
will the public want, and which is best for them? This is the
question future lawmakers will be forced to answer.