Do you get to keep a fraudulent money transfer that you are entitled to?

Question

Reading this story got me speculating: https://www.bloomberg.com/opinion/articles/2021-02-17/citi-can-t-have-its-900-million-back TLDR: CitiBank accidentally wired $900m to creditors of a company they were the administrative agent for. The company had wanted to restructure the debt and avoid paying the full amount, but some poor shmuck at Citi made a whoopsie. Citi sued for the money and lost, because of the “discharge-for-value defense”:

The recipient is allowed to keep the funds if they discharge a valid debt, the recipient made no misrepresentations to induce the payment, and the recipient did not have notice of the mistake

What if the transfer had been fraudulently made by a hacker who had paid off several creditors to make it impossible to pinpoint what creditor he was working for and most recipients genuinely didn't know they were going to get the money they were entitled to, but otherwise 100% criminal. Would the doctrine still apply?

Answer 1

The linked Bloomberg story quotes the rule as:

The recipient is allowed to keep the funds if they [the funds] discharge a valid debt, the recipient made no misrepresentations to induce the payment, and the recipient did not have notice of the mistake.

If the recipient, or somone acting on behalf of the recipient, hacked the sender to induce the payment, that sounds like a form of misrepresentation to me. If the hacker is unconnected with the recipient there seems no way that the hacker benefits financially, although I suppose a hacker might simply want to cause an amusing disruption.

As I understand it this rule only applies when the sender in fact owes a debt to the recipient that the transfer pays off.

If the hacker were working for one of a large group of recipients, most of whom are innocent, and subsequent analysis establishes that there was a hacker, but not who the hacker was or which of the many recipients the hacker was working for, I suspect, but cannot prove, that the doctrine would not apply, because the transfer was not a valid but incorrect act by the sender, but was a fraudulent intervention in the sender's procedures.

Answer 2

You keep the money, but you still may be criminally liable for fraud (which may end up having to pay a fine, or imprisonment).

Bookkeeping and crime are apples and oranges here. If you were owed money by someone and somehow got that money from them, you keep it.

However, the fact that you are owed money does not authorize you to commit crime e.g. to hire hackers and defraud. "Discharge-for-value" is a defense only against having to pay back, not against the crime of fraud. This crime will be prosecuted on its own — notwithstanding with the debt you were owed and got paid off by way of committing the crime.

Answer 3

The question can be reworded like this:

A company is about to restructure, which will avoid settling some valid debts in full. In this variation of the news story, the company validly owes money to many creditors, who will have to settle for a loss during the restructure. One of these creditors, covertly hires a hacker, who "creates" the fumbled money transfer. To prevent the guilty creditor being identified the hacker fixes it so the next time the accounts operator uses their payment module, a list of 10 selected creditors will be paid in full, one of which is his employer, the other 9 are red herrings.

The answer is probably this:

• If it's done cleverly and not suspected to be a hacked outcome, then it'll be treated as a valid payment of a valid debt, and hard to get it repaid. Same as in the news story.

• If its suspected to be a result of foul play (e.g. by a creditor or hacker or grudge-bearing insider), the police will look into the books, dealings, phone calls etc of all 10 companies and the paying company, and anyone else they believe relevant, and see if evidence exists to support their suspicions. If not, then as above.

If there is evidence pointing to foul play, there are now 2 or 3 possibilities.

• If no specific evidence implicates any given party, then even if it's clear there was foul play, each recipient can plausibly deny involvement, and the fact it was foul play doesn't invalidate or undermine their stance. They all (including the guilty creditor) get to keep the money if they can maintain their position and don't mess up.

• If there is evidence/suspicion pointing to some specific creditor, but not enough to successfully prosecute or litigate, it comes down to moral pressure, media perception.... is it uncomfortable enough that the company alleged to have engineered it, repays the money, or do they keep it.

• If there is enough evidence to successfully prosecute or litigate, then the money will be repayable, and probably criminal charges will be followed up.

This reminds me of the criminal question, if a crime is done and the evidence shows its one of 2 identical twins (Jane and June), but can't distinguish which, and both can and do plausibly claim its the other, and a prosecutor can't prove beyond reasonable doubt that Jane was the criminal and also can't prove beyond reasonable doubt that June was the criminal, and its clear one is honest and one lying, then they don't get to say "its one of them so lock both up". They have to let both go.

In this case, even a suspicion or certainty that one of the 10 creditors created the payment by hacking or fraud, is useless, for prosecution or litigation, because its not enough to be able to say the payment was by fraud. (A payment of a valid debt can be fraudulently paid and still validly kept if a company genuinely wasn't aware and acted correctly.) You have to be able to show some specific recipient has money that wasn't received in good faith, and therefore has "dirty hands", to be able to recover money from them, or prosecute them for it. In that sense its a bit like the identical twins thing.