By Yong Soo Heong
The following article is the 7th of a series of 10 articles on cross border transactions and remittances. These articles will explore the rules and regulations that monitor these transactions, the requirements Malaysian individuals or companies must fulfill when undertaking such payments via banks. They will also look into how sufficient the existing systems are in ensuring transparency in cross border remittances and the role banks and financial institutions play in the traceabillity of the funds, and their obligations to their clients in the event of returned remittances.
Duty of Care and Negligence in the Return of Remittances by Banks
As banks play a crucial role in financial transactions, they have a fiduciary duty to ensure the smooth transfer of funds between individuals and businesses. However, when remittances are inexplicably returned after being sent out—especially due to errors—questions arise regarding the duty of care banks owe to their customers.
Negligence in handling such transactions can lead to financial distress, loss of trust, and even legal consequences. So, what redress can the customer expect and what must banks do to avoid such mistakes? To avoid such financial frustration, does it mean that banks have to exercise more stringent controls?
The duty of care in this respect refers to the legal and ethical obligation banks have to act in the best interests of their customers. This includes ensuring transactions are processed accurately, securely, and without unnecessary disruptions.
Hence, banks are expected to exercise reasonable care and skill when handling remittances, ensuring that funds reach their intended recipients without undue delay or reversal. However, when funds are mistakenly returned, customers may suffer financial losses, missed payments, or reputational damage.
When negligence occurs especially when a bank fails to uphold its duty of care, it can lead to errors in remittance processing. Common causes of negligence include failure to verify transaction details like incorrect recipient information or processing errors; weak internal controls like lack of proper checks before reversing transactions; and poor communication especially when customers are not informed promptly about returned funds.
Other causes include system failures due to technical glitches causing unintended reversals and human error as a result of mistakes made by bank employees during transaction processing.
When negligence occurs, customers may have grounds to hold banks liable for financial losses, especially if the bank failed to take reasonable steps to prevent the error.
What is the scope of liability then? How can banks treat their customers better?
Banks must ensure that customers are treated fairly when funds are mistakenly returned. The scope of liability cover a number of areas. They include:
1. Transparent Communication
Banks should promptly notify customers when a remittance is returned, providing clear reasons for the reversal and offering solutions to rectify the issue.
2. Compensation for Losses
If a customer suffers financial harm due to a bank’s negligence, the bank may be liable for compensation. This could include reimbursement for fees, penalties, or lost business opportunities.
3. Improved Customer Support
Banks should have dedicated teams to handle remittance disputes efficiently, ensuring customers receive timely assistance and resolution.
4. Strengthened Compliance Measures
Banks must adhere to regulatory standards that govern remittance transactions, ensuring compliance with anti-money laundering (AML) and fraud prevention protocols.
What recommendations can be made for more stringent Internal Audit Controls?
To minimise errors and negligence in remittance processing, banks should implement robust internal audit controls. There are key recommendations like Enhanced Transaction Verification and having Automated Error Detection Systems in place.
In the area of Enhanced Transaction Verification, banks should implement multi-layer verification before processing remittances, thus ensuring accuracy in recipient details and payment instructions. As for employing Automated Error Detection Systems, banks should explore the benefts of AI-driven monitoring tools that can detect anomalies in transactions, flagging potential errors before funds are mistakenly returned.
More robust controls also include regular internal audits as frequent audits to assess remittance processing leads to improved efficiency in identifying weaknesses and areas for improvement.
Central to this is putting in place employee training programmes so that they can receive continuous training on remittance handling, fraud prevention, and customer service best practices. Regulators can introduce certification programs to ensure financial professionals understand their obligations.
Another pro-active stance will be to have stronger regulatory compliance checks like working closely with financial regulators to ensure compliance with remittance laws, reducing the risk of negligence-related disputes.
This is because regulatory bodies play a crucial role in ensuring banks uphold the highest professional and fiduciary standards. To strengthen oversight and accountability, they can implement more robust measures.
These include stricter compliance requirements for re regulators to require banks to demonstrate adherence to fiduciary responsibilities. This includes mandatory audits, enhanced reporting obligations, and real-time monitoring of financial transactions.
Another area is the advocation of stronger consumer protection regulations can ensure banks treat customers fairly, especially in cases of remittance errors. Regulators can mandate compensation policies for affected customers and enforce penalties for negligence.
Another key mechanism is having Independent Oversight Committees to oversee banking operations and help prevent conflicts of interest. These committees can conduct random audits, investigate complaints, and ensure banks adhere to ethical standards.
As a matter of deterrence, banks that fail to meet fiduciary standards should face hefty fines, licence suspensions, or legal action. Regulators can introduce tiered penalties based on the severity of negligence, ensuring financial institutions remain accountable. In addition, regulatory bodies can mandate public disclosure of banking errors, remittance failures, and customer complaints. This transparency encourages banks to improve their internal controls and maintain trust with customers.
Conclusion
By implementing stricter compliance measures, AI-driven fraud detection, independent oversight, and stronger penalties, regulatory bodies can ensure banks toe the line and uphold the highest fiduciary standards. These measures will protect consumers, enhance financial stability, and restore trust in banking institutions. The duty of care in banking is fundamental to maintaining customer trust and financial stability. When remittances are mistakenly returned, banks must take proactive measures to address errors, compensate affected customers, and strengthen internal audit controls.
By implementing transparent communication, enhanced verification processes, and rigorous compliance measures, banks can minimize negligence and ensure remittance transactions are handled with precision and accountability.
–WE