> Isn't the obvious solution to also reverse the transfer from Bank B to Bank C? If multi-hop transfers are treated as irreversible, then it creates an incentive for fraudulent sellers to collect all payments through multiple hops.

Well ... some kinds of transferring wealth are legally harder to reverse after the first transfer.

In the United States, an old-fashioned way of moving money between people, the "check", has behavior specified in Uniform Commercial Code Article 3, Negotiable Instruments.

Article 3 is worth a read; it has filled in a lot of gaps for me about the bare-minimum legal requirements associated with activities like writing a check, post-dating a check, negotiating a check, stopping payment, etc. (In practice banks may do more than the minimum for customer service but it's interesting to understand the basics).

One of my favorite parts is the "holder in due course" rule ("§ 3-202. NEGOTIATION SUBJECT TO RESCISSION.")

If a check gets endorsed a couple of times and a new person takes it in good faith, then that new person is a holder in due course. Some remarkable things happen: even if the check has gotten a stop payment or has otherwise been dishonored, a holder in due course now has the right to the money promised by the check.

I wondered why the law would set up such a convoluted way of making certain payments irreversible. My dad explained:

"""[A] a widely accepted legal framework for negotiable instruments was critical to trade in the era before electronic payments. The problem is convenience - how can a buyer safely pay for goods or services without carrying around a lot of cash? The holder in due course rule basically lets the buyer's bank rely on the form of the negotiable instrument (including a genuine signature) without risking a claim for wrongful payment based on other facts about the sale it can't know."""

So -- can someone take advantage of this behavior to turn a dubiously valid check into an irreversibly one, and get the money?

Yeah! Totally! There's a guy named Robert Triffin who is, like, famous for buying dodgy checks at below their value, cashing them, and suing to get his money when the payor refuses to pay up. I don't have firsthand info about this, I just read news articles, but I think he gets a decent ROI. (See e.g. http://appellatelaw-nj.com/the-first-triffin-case-of-2011/

P.S. Some of my other favorite things about this instrument in the UCC:

* a signature is any mark you intend to be your signature (§ 3-401);

* a check can be written with almost any text and in almost any format on whatever you want (§ 3-104);

* checks can go stale six months after the datestamp but banks can choose to honor them anyway (§ 4-404);

* writing a future date on a check doesn't legally prevent it from being cashed unless you also tell your bank about the postdating in the same way you would make a stop payment order ( § 3-113, § 4-401 )

* If you have a dispute with someone about how much money they owe you for a service, and they give you a check, you can cash the check and write "without prejudice" to indicate that you aren't agreeing that this is the correct amount owed but you do want their money (§1-308). UNLESS the payor has written on the check "a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim" (§ 3-311), in which case cashing that check discharges your claim. Which all frankly seems like a mess.