In the recent case of Jeremy Stone v National Westminster Bank Plc  EWHC 208 (Ch), Mr Justice Sales in the High Court confirmed that a private banker who follows his bank’s processes and his client’s instructions, acts honestly and is not aware of his client’s fraudulent activities is not liable (and therefore neither is his employer bank) to his client’s defrauded investors. This is hardly a remarkable decision, although it is nonetheless welcome as it confirms that a private banker’s duty of care in tort is limited to the contractual duties he owes his client. What is of more interest is the Court’s obiter comments that this would have been the case even if the bank’s back office had been in breach of its regulatory (AML) duties.
The causes of action
The Claimants (Jeremy D. Stone Consultants Limited and Mr Jeremy Stone) advanced claims against NatWest and one of its relationship managers (RM) alleging:
- dishonest assistance by RM in a breach of fiduciary duty by Mr Jolan Saunders and his company;
- deceit by RM;
- conspiracy by RM with Mr Saunders and his co-fraudster Mr Michael Strubel to injure the Claimants by unlawful means;
- negligence by RM; and
- unjust enrichment of NatWest by its receipt of monies paid by the Claimants into the fraudsters’ bank accounts with NatWest.
(In relation to claims 1-4 the Claimants also alleged that NatWest was vicariously liable for RM as its employee.)
The majority of the judgment (234 of the 261 paragraphs) deals with the underlying factual position. It is a long saga that includes a number of near misses on the Claimants’ part; instances in which the Claimants would have discovered the fraud sooner had they persisted in their due diligence. Indeed, the Court found that, had it been relevant, the Claimants’ failure to conduct adequate due diligence would have resulted in a significant reduction of any damages awarded to them because of their own contributory negligence.
Mr Saunders, a school friend of the second Claimant, with a background in running a wholesale electrical business, perpetrated a fraud on the Claimants. Mr Saunders convinced them that he was a supplier of electrical goods to a number of large hotel chains. Since 2006, Mr Saunders convinced the Claimants and other investors, on an ever increasing scale, to invest in his business by way of loans. Earlier loans were repaid with later investment money in order to create the illusion that the business was thriving and to continue to attract further investments into this Ponzi scheme.
Mr Saunders, and his co-fraudster Mr Strubel, held bank accounts with NatWest. They were both clients of RM, who was responsible for about 100 clients of NatWest. RM believed the hotel business was genuine. On inheriting these accounts from the previous relationship manager in late 2008, RM learned that Mr Saunders frequently made large cash withdrawals from his accounts. RM also learned that these transactions had been investigated by the bank’s Anti-Money Laundering (“AML”) team, which had concluded its investigation on the basis that it had received sufficient explanations as to why their business was conducted using large cash withdrawals. Indeed, the bank’s AML team looked at these transactions again in 2009 in order to check that Mr Saunders was not perpetrating a VAT fraud and again concluded its investigation on the basis of sufficient evidence to the contrary.
The Claimants contacted RM on a number of occasions to gain access to Mr Saunders’ bank statements and to seek a loan from NatWest to assist with the running of the hotel business. On each occasion the Court found that RM made it clear to the Claimants that he owed a duty of confidentiality to Mr Saunders and could not discuss any of his affairs without Mr Saunders’ instructions. Mr Saunders never gave such instructions. Unsurprisingly, the evidence established that Mr Saunders said one thing to the Claimants and another to RM.
In February 2010, during the course of a discussion between the Claimants and RM about the prospect of a loan from NatWest, RM learned that the Claimants believed the receipts from the hotel business were paid directly into Mr Saunders’ NatWest account. RM knew this was not the case. Instead, he had been told that the monies were paid into Mr Saunders’ account with Barclays and that monies were then transferred to NatWest. Mr Saunders’ explanation for this was that Barclays had agreed to clear the hotel business’ cheques on a shorter timescale than NatWest. On 28 April 2010, as a result of a computing error, and contrary to Mr Saunders’ instructions, the Claimants were able to view Mr Saunders’ NatWest bank account statements. At this point it became evident to them that they had been defrauded. The Claimants then took steps to have as much of the remaining money as possible transferred back to them before alerting the SFO to the fraud.
The Court found that although RM knew the Claimants were mistaken about which bank was receiving the proceeds from the hotel business, he:
- did not act dishonestly;
- did not suspect Mr Saunders of fraud and believed the hotel business to be genuine;
- did not owe and had not assumed any duty to the Claimants to correct their misunderstanding; and
- believed that the Claimants had conducted their own due diligence on the hotel business and understood it better than he did.
On the basis of these findings of fact, the Court found that none of the Claimants’ first four causes of action (listed above) succeeded. With regard to the fifth cause of action, the alleged unjust enrichment of NatWest, the Court found that this did not succeed because NatWest was not unjustly enriched by Mr Saunders’ depositing of the Claimants monies with NatWest, and even if it was so enriched, it had a good defence. It is here that the Court made some interesting points, which are of wider relevance to private banking disputes.
In particular, the Court found as follows:
- Although NatWest’s receipt of these monies added to “its stock of assets”, this increase in assets was immediately matched by its corresponding liability to repay these monies to Mr Saunders. This meant that NatWest was not enriched by these payments.
- Even if NatWest was enriched it had a good defence (so long as it was not aware of the fraud) on the basis that it was contractually obliged to repay these monies to Mr Saunders (defence of ministerial receipt) and because it had changed its position (taking in and paying out sums from its accounts) in good faith.
- NatWest was not in breach of its AML obligations, but even if it had been, the defence of good faith change of position would still be open to it. A breach of its AML obligations would constitute “regulatory failures which were insufficiently grave to debar NatWest” from relying on this defence. The Court found, on the facts of this case, that such breaches would have been “relatively technical in nature”, and would not have been sufficient to satisfy the relevant test of bad faith. Accordingly, it appears the Court was mindful of the very low level of suspicion that is required in order to engage a money laundering reporting obligation.
- The key test was that the RM “did not suspect money laundering”, and was entitled not to suspect such activity based on the information he had received. The RM was also entitled to believe that NatWest’s AML team had “fully investigated matters and made such reports as might be necessary to the authorities”.
This is obviously a welcome conclusion for both private bankers and their employer banks. It affirms that private bankers owe a duty of banking confidentiality to their clients. This is a duty which prevents them from telling others about the operation of their clients’ accounts. As long as they do not act dishonestly, have good reasons for their beliefs, and do not shut their eyes to the truth, they (and their employer bank) are not liable to others. Finally, this remains the case even if their employer bank has not complied with its regulatory obligations.