The Green Book, which provides guidance on processing federal benefit payments, explains that an ACH payment must be returned if the financial institution receives a benefit payment after it has actual or constructive knowledge of the death or legal incapacity of a recipient, including a representative payee. Failure to return post-death ACH payments may result in a financial loss to the financial institution, particularly if the financial institution did not act after having actual or constructive knowledge of death or legal incapacity of the representative payee. Therefore, when processing Federal Benefit Payments, one common question arises with financial institutions: “What constitutes constructive knowledge, what are considered commercially reasonable practices and what is the financial institution required to do once it has constructive knowledge?"
Constructive knowledge is defined as ‘being reasonably expected to know something.’ This differs from actual knowledge, which means to definitively know something. To navigate the processing of payments most effectively we need to understand how to identify constructive knowledge and the pros and cons of possible forms of constructive knowledge. Let’s dive into the benefits and possible downfalls of common constructive knowledge events.
Social Media
If a financial institution has a strong social media presence and engages with clients through this channel, the financial institution could potentially learn of a client's passing or the legal incapacity of the representative payee through social media.
So, what are the benefits of acting upon a social media post regarding a client’s passing? You would be able to flag the client's account, limiting your liability related to any post-death payments and potentially return any incoming post-death payments that may attempt to post after you have flagged the account. It would also be considered best practice to close any open debit cards, bill pay accounts and turn off any automatic transfers.
Now, we need to look at the potential downfalls of acting based on a social media post. First, we need to check the validity of the information: is the source a relative or just an average individual in the community? Also, is the deceased individual your client or just someone else with the same name? The potential downfall of acting on a social media post would be “death by ACH.” This term means the government received notice of an individual’s death, but the person is not deceased. If a financial institution decides to act without checking the validity of the source of the social media post, they could potentially cause “death by ACH” to their valued client, causing understandable frustration and confusion.
Family Members
At times financial institutions may receive a phone call from a family member to notify the organization that the account holder, the caller’s family member, has passed. Whether by phone or in person, the financial institution has now been notified. Now the financial institution can flag the accounts, stop any incoming post-death payments, close any open debit cards, close bill pay accounts, turn off any automatic transfers and, if applicable, work with the surviving individual on the account to get the necessary documents to remove the deceased person from the account.
However, the downfalls of acting upon a family member’s notification are related to client relationships. It can be a sensitive subject to discuss removing someone’s name from an account. If the surviving individual on the account happens to be the family member who has notified you, this could also bring up conversations like future payments being owed to the deceased person. Financial institutions, as a best practice, should leave the determination of benefit entitlement up to the issuing agencies.
Word of Mouth
Word of mouth is oftentimes a friend, or just an individual in the community, who happened to hear of someone passing and they decided to inform a teller. With this type of notification, the financial institution needs to consider the validity of the source to decide if it should act on it. The benefits of acting on this notice include flagging the account, stopping any incoming post-death payments and closing debit cards. The downfall could be another case of “death by ACH.”
Obituaries
Some financial institutions review their local newspapers and funeral home websites for obituaries. While this practice is somewhat common, especially in more rural communities, it still poses a level of risk to the financial institution. The practice of reviewing obituaries offers the same benefits and risks discussed previously with social media, family members and Word of Mouth, except for the risk of validity. Instead of being concerned with validity, you must be more concerned with whether the listed deceased person is your client or just shares the same name. You must also consider how to verify if the deceased is truly your client. This type of notification does require research to ensure you do not perform “death by ACH.”
Death Notification Entries (DNE)
While DNEs are Entries sent from the Government agencies, they are still a form of notification and have associated risks. Once the financial institution receives a DNE they are encouraged, as listed within the Green Book, to flag the client’s account as deceased so that future payments can be returned. The benefits to acting on a DNE as constructive knowledge are proper identification of the deceased individual and the ability to flag the account, stop future payments from posting, close any debit cards, bill pay accounts and cancel any automatic transfers. However, oftentimes financial institutions receive DNEs after a post-death payment has been posted to the deceased client's account, which leaves the financial institution with at least a 45-day liability. If funds are not available to return the post-death payments that were received before the DNE, then the financial institution should anticipate a reclamation.
Commercial Reclamations
Now and then financial institutions will receive Commercial Reclamations, which also act as a form of notification to the financial institution of the client’s passing. Per 31 CFR Part 210, the reclamation provisions listed within 31 CFR Part 210 preempt those of the ACH Rules. This simply means the provisions for a government reclamation come before those of a commercial reclamation. In fact, within Subsection 3.6.3, Amount of RDFI Liability for Reclamation Entries and Written Demands for Payment, it states, if the RDFI makes a payment pursuant to Section 3.6 that is subject to a subsequent claim of the United States Government under 31 C.F.R. Part 210, the RDFI is entitled to reimbursement by the Originator in accordance with Subsection 2.10.5 (Superiority of United States Government Claims). The benefits to receiving this type of notice would be the same as those mentioned above but the downfalls, or risks, would be similar to those mentioned within social media, word of mouth and DNEs. With this type of notice, the financial instruction needs to consider the source, research to ensure it is the same client and ensure funds are not only available for return but also determine if they are subject to reclamation by a government agency.
Federal Reclamations
While reclamations can be time-consuming, they do serve as a source of constructive knowledge that assists with ensuring the client listed in the reclamation is the financial institution’s client. Federal reclamations usually have some form of identifying factor to ensure the financial institution’s client is the client the reclamation is referencing. The benefits to utilizing a federal reclamation as constructive knowledge are like those of DNEs. The downfalls to waiting until receiving a reclamation include funds not being available for return. This means the financial institution would need to respond promptly to the reclamation to identify any withdrawals that may have occurred and return any partial payments, if applicable, to limit liability. If only partial funds are available for return the financial institution could potentially be liable for the remainder of funds if they do not meet the qualifications for limiting liability, as outlined within the Green Book, chapter 5, Section 2-B, Limiting Liability.
As they say, (constructive) knowledge is power. Returning post-death federal benefit payments timely is the best approach a financial institution can take to limit its liability and understanding the various methods of constructive knowledge gives the financial institution the power to keep its losses to a minimum.
Not sure if your processes and procedures will limit your financial institution’s risk of loss when it comes to post-death benefit payments? Give our experts a shout at [email protected]! We can examine your policies, procedures and practices to find efficiencies and opportunities to reduce your risk of loss. |
