One of our branches sent us copies of wires that they had done for one of our UTMA accounts.

They wired money from it to a personal account of the custodian. I say that we could be held responsbile if something ever comes up on this because we knew where that money was going and it is defintely not for the benefit of the child, it is the custodians business account.

We are in Texas. Does anything see it any differently than I do?

"I say that we could be held responsbile if something ever comes up on this because we knew where that money was going and it is defintely not for the benefit of the child"

How do you know? If the transfer was ordered by the custodian, that is your only responsibility. It will be the custodian that is on the hook.

Agree with Randy. We try not to presume anything and the custodian is the responsible party!

I'll dissent here.

If the custodian wrote a check on a UTMA to his business there would not be much you could do about it. With a wire, you're involved and, in my opinion, well aware of the breach.

What's done is done, but I would write the customer a letter confirming the wire information and drawing it to his attention that it came from the UTMA account "...just to make certain that was what was intended." I don't want him coming back "X" years in the future and saying we made a mistake and: "I would have never taken money from that account for my own use!"

In addition, it would not happen again...

As add as it sounds, I'll agree with Randy here - and maybe this varies some by state - but (in Texas) our interpretation is that the custodian can do anything with the funds and answer only to the IRS during an audit, should one occur - or to the minor at age of majority.
Our contract is with the custodian and we are not account monitors.
I will agree with Ken in the fact that with a wire we would definitely have the review opportunity - but I don't think that is our responsibility (due monitor account use).

Section 16 of my state's (Massachusetts) UTMA says third parties dealing in good faith with the custodian, in the absence of knowledge, is not responsible for determining ... the propriety of the application of any property of the minor delivered to the custodian. That suggests that the bank would have to be innocent of the fact the funds were transferred to the custodian's benefit in order to escape any form of accountability. Even if a bank could be insulated from liability, that doesn't mean it has to ignore a problem that's in its face. I'm in Ken's camp on this question.

FWIW - I agree that the bank is not responsible to ensure that all money in UTMA accounts are being used for the benefit of the minors by the custodians. It is the custodian's responsibility to understand and adhere to his/her fiduciary duties.

That being said, if circumstances are such that the bank is faced with a set of facts that would, in the mind of a reasonable person, raise red flags as to potential misuse of the money by the custodian, I think the bank has an obligation to take additional steps.

In this case, I think it would be reasonable to question the use/purpose of the transfer and take a closer look at the account to ensure there is no other evidence of unusual or suspicious activity. Kudos to the branch staff for being proactive!

I will agree with Ken and John on this point. It is true that the custodian has ultimate liability/responsibility for the actions he/she takes with respect to the custodial funds. When the minor reaches the age of majority, the minor can sue the custodian if the minor finds the custodian breached his/her fiduciary duty over the handling of the custodial funds.

The reality is if the custodian does not have the financial ability to repay the minor if the custodian improperly spent the custodial funds for the custodian's benefit, the minor's attorney will look for someone else to sue - someone with deep pockets and that will be the bank.

The attorney will allege the bank knew or should have known what the custodian was doing and the bank aided and abetted the custodian's breach of fiduciary duty. The bank ultimately may prevail in any such lawsuit but only after spending a lot of money in legal fees and costs - and should the bank decide to settle the case or lose the case, the cost will go higher.

I have been involved in lawsuits where minors sue their custodians/guardians after they become adults and if any part of the problem involves how custodial funds in a bank account were spent, the bank is always sued.

Since the bank's fingerprints are on the wire transaction sending funds from the custodial account to the custodian's business account, the bank should expect a claim to be asserted against it if the custodian doesn't properly spend those funds. An argument to the minor's attorney that the custodian is the party at fault won't stop the attorney from naming the bank in any lawsuit.

Hmmm... I'm having trouble finding lawsuits in which the bank was named. Any help on that?

Generally, only appellate decisions are published and can be cited as precedents. Who knows, assuming you searched diligently, it could be that every bank who lost a UTMA related suit was smart enough not to appeal and thus guarantee press coverage. The one where I was deposed as an expert witness on the UTMA was settled the day after the bank received its copy of the deposition. Settlements are obviously not publicized.

It's hard for many bankers to theorize exactly how it is they are going to get sued by a 6 year old or an adult 12 years later. In my limited personal experience, it was when mom and dad got a divorce and mom realized the UTMA account on which dad was custodian was gone or had been looted. She either told the adult child or brought suit on behalf of the minor child. Both of those were settled, but not in the bank's favor.

I truly don't see any difference in this situation and others where the bank "should have known" something wasn't right and alerted authorities that suspected unauthorized actions were taking place.

With respect to Randy's comment, my experience is similar to Ken's - i.e., all of the custodian litigation cases on which I have worked have been settled so there is no public court decision to review. Reported court decisions make up an extremely small percentage of all litigation matters which are filed. The lack of reported cases involving banks being sued over custodian's misappropriation of custodial funds doesn't mean that such lawsuits aren't filed against banks.

With respect to Kathleen's comment, many cases that argue a bank is liable for an account owner's loss go nowhere because there are no facts to support a finding the bank had knowledge of the underlying bad act.

For example, in check forgery cases, banks will rely on the defense that it need not verify check signatures and that it had no knowledge of any wrongdoer committing the forgeries because the customer didn't say anything to the bank after receiving their statements. The post indicates a wire transaction is involved - unlike the check forgery situation, a bank does review the transaction and specifically becomes aware of the details of the transaction (moving custodial funds to the custodian's business account).

During discovery in bank litigation, plaintiff attorneys look for any evidence that bank personnel became aware of the underlying bad acts and then didn't stop them or bring them to the attention of the account owner. They do this so they can overcome the defenses/protections afforded banks under banking statutes and case law (generally stating a bank has no duty to monitor bank accounts). Any general rule standing for the proposition that a bank isn't liable for what it doesn't know and need not investigate to find out what it doesn't know, can be overcome if the bank does know facts that indicate something isn't right and does nothing to stop it or take some action about it (in other words, a bank can't turn a blind eye to the situation).

True, but in terms of BSA requirements to report suspicion, I would be very cautious with anything like this. If the bank suspects someone is illegally taking funds, I would hesitate to ignore it from a BSA perspective. The bank can always be sued, but you still have BSA responsibilities regardless of the ultimate outcome.

I agree with your comments. My comments solely related to the potential litigation exposure to a bank from the minor. The fact that a bank believes it may not have not liability to a customer on any improper/fraudulent transaction does not relieve the bank from any duty it has under BSA to file a report, after it has the necessary facts from a BSA perspective to trigger a reporting requirement.

If you're in Texas, legal counsel for TBA just answered this very same question a couple of weeks ago.......in their weekly newsletter.

Did they give the right answer or the wrong answer?

RBanker - Could you share that? I'm not a member of TBA.

Ken - ha - will let you decide that -

txbkr - see if this link works for you - not sure if you have to be a member or not. Let me know.

http://texasbankers.informz.net/admin31/...&mi=1490933

I don't see that the TBA opinion is out of line with other comments here. It doesn't address what the bank ought to do when it has facts in its face that point to misuse of the funds.

That is the scary part. It is a compartmentalized response.

Has anyone ever reported potential abuse of a custodial account to a state child protection agency/other similar department? We have a situation similar to the above in that I'm concerned a minor is being unlawfully deprived of their future funds and I'd prefer to take whatever actions are feasible to assist.

Thank you.

I have never heard of doing so. You could file a SAR if it meets the dollar thresholds. I think your only other option is to call your state child protection agency/other similar department and just ask them this general question to see if they have any interest in such a situation or even have any jurisdiction over such a situation before sharing any specific information.