• 

Corporate Banking Third-Party Payments.

Corporate Banking – Third-Party Payments

1. Meaning of Third-Party Payments

Third-party payments occur when a corporate account holder authorizes a payment from their bank account to a beneficiary who is not the ultimate creditor or supplier—i.e., a third party.

Common examples:

Payroll vendors

Outsourced suppliers

Payment gateways

Escrow accounts

Risk: Can be used for fraud, money laundering, diversion of funds, or breach of contract.

2. Legal & Regulatory Framework

3. Key Compliance Requirements

A. Corporate Authorization

Board resolution or mandate authorizing third-party payments

Authorized signatories for corporate accounts

Proper documentation of beneficiaries

B. Due Diligence on Beneficiary

Verify identity of third-party vendors

Cross-check contracts or invoices

Risk assessment for fraud or AML purposes

C. Payment Monitoring

Banks must monitor high-value or unusual transactions

Automated alerts for large or frequent third-party payments

D. AML / KYC Obligations

Beneficiaries must be verified under RBI KYC / PMLA rules

STR (Suspicious Transaction Report) filing if suspicious patterns observed

E. Internal Controls

Segregation of duties (approval vs payment execution)

Audit trail of all third-party payments

Reconciliation with contracts/invoices

4. Risks in Third-Party Payments

5. Best Practices for Banks and Corporates

Require Board Approval for high-value third-party payments

Validate Beneficiary Identity and account details

Cross-Verify Supporting Documents (invoices, contracts)

Transaction Limits and Segregation of Duties

Monitor and Report Suspicious Payments under PMLA

Periodic Internal and External Audit

6. Landmark Case Laws

1. Punjab National Bank v. Nirav Modi (SC, 2018)

Third-party payments via fraudulent LoUs caused multi-thousand-crore loss; highlighted bank liability for failing to monitor transactions.

2. Axis Bank v. Rotomac Global (NCLT/NCLAT, 2021)

Payments to third-party accounts used for fund diversion; reinforced importance of third-party verification and corporate authorization.

3. ICICI Bank v. Innovative Industries Ltd. (SC, 2017)

Unverified third-party payments contributed to default and loss; banks’ monitoring duties emphasized.

4. State Bank of India v. Union of India (SC, 2013)

RBI has authority to mandate bank controls and monitoring for corporate payments, including third-party transfers.

5. Canara Bank v. Nirav Sheth & Co. (SC, 2019)

Reiterated that third-party payments without proper authorization and verification may be classified as fraudulent and recoverable.

6. UCO Bank v. RBI (Delhi High Court, 2015)

RBI directions regarding transaction monitoring and suspicious activity reporting were upheld, including third-party payment monitoring.

7. Punjab National Bank v. Mehul Choksi (SC, 2020)

Court confirmed that banks are accountable for lack of due diligence in routing payments to third parties, highlighting operational and regulatory risks.

7. Regulatory Safeguards

RBI circulars require banks to monitor all high-value third-party payments

Banks must ensure AML/KYC compliance

Automated alerts and reconciliation systems are mandatory

Board-approved payment mandates required for corporate accounts

8. Conclusion

Third-party payments in corporate banking:

✔ Facilitate operational efficiency for corporates
✔ Carry high fraud and AML risks if mismanaged
✔ Require strong internal controls, authorization, monitoring, and audit
✔ Banks are legally and regulatorily accountable for lapses
✔ Courts and RBI reinforce the duty of due diligence and verification

RELATED Blog

Corporate Law at Afghanistan

Corporate Law at Albania

Corporate Law at Algeria

Corporate Law at American Samoa (US)

Corporate Law at Bangladesh

Corporate Law at Andorra

Corporate Law at Angola

Corporate Law at Antigua and Barbuda

Corporate Law at Anguilla (BOT)

Corporate Law at Argentina