Curbing fraud and money laundering are top of the international regulatory and political agenda. It is widely acknowledged that private financial institutions have a part to play, but the scope of their legal responsibility is not always clear. This article pulls together three recent high-profile decisions which clarify the standards currently expected of banks, in particular, and the financial services sector more generally.
Daiwa v Singularis1 – suspend suspicious payment requests until you have made reasonable enquiries to satisfy yourself that the payments can be properly made (Quincecare duty).
Earlier this month, the Supreme Court dismissed an appeal and held a bank (Daiwa) liable to its customer (Singularis) for breach of its Quincecare duty. Banks have a contractual obligation to perform the authorised instructions of their customers. They also owe a duty of care, not to execute a customer’s instruction if the bank knows (or should know) that the instruction is dishonestly given2. This is known as the Quincecare duty of care.
By the time this case reached the Supreme Court, there was no dispute about whether or not a Quincecare duty was owed by the bank. Instead, the bank sought to deflect liability for breach of this duty by demonstrating that the fraudulent mind of the person authorised to instruct the bank (who was also the Chairman, sole shareholder and the “directing mind” of the company), should be attributed to the bank’s corporate customer, Singularis. If the court allowed this attribution, the bank hoped to avoid liability by raising the defences of illegality; lack of causation; and an equal and opposite claim for deceit.
The Supreme Court was not prepared to attribute the instructing individual’s fraudulent mind to Singularis and held that the proposed defences would have failed in any event. It also explained, obiter dicta, what the bank should have done. In this case it was clear that the bank was aware of the fraudulent intent behind the instructions it received: “…everyone [at the bank] recognised the account needed close monitoring but no one exercised that level of care”. The bank “should have realised that something suspicious was going on and suspended the payment until it had made reasonable enquiries to satisfy itself that the payments were properly made”.
Federal Republic of Nigeria v JP Morgan3 – The Quincecare duty can only be excluded by very clear words.
The Federal Republic of Nigeria (“FRN”) claims the bank paid out $876m (on the instructions of an authorised individual) and that these payments were made as part of a corrupt purchase of oil production licences. The bank applied for strike out and / or reverse summary judgment on the basis that it had expressly excluded the Quincecare duty of care via various clauses in the depositary agreement entered into by the FRN.
The High Court held that the clauses relied on by the bank did not, on a reading of the agreement as a whole, exclude the implied Quincecare duty. In October, the Court of Appeal agreed and held that: “it would need very clear words” to exclude the Quincecare duty.
N v RBS5 – terminating a client relationship where there are suspicions of money laundering.
N sued its bank for breach of contract and negligence following the bank’s decision to terminate, without notice, its contract to bank N. The bank suspected money was being laundered through N’s accounts. It froze the affected accounts; did not process the relevant payments; and terminated its relationship with N.
The contract between N and the bank obliged the bank to give notice of its intention to terminate the relationship, unless there were “exceptional circumstances”. Liability for a refusal to execute a payment instruction was also contractually excluded if that refusal was “in [the bank’s] reasonable opinion….in the interests of crime prevention…”.
The High Court upheld the bank’s decision and its reliance on these clauses, determining it a “proper response to circumstances for which N, not the Bank, must take responsibility”. Further, the bank was praised for its handling of the matter. It identified the suspicious activity; reported this to the National Crime Agency, held a series of meetings, sought legal advice in the lead up to the final decision to terminate; and made its decision rationally and in good faith, having considered the technical framework within which transactions operate. Overall, it was held to have adopted a proportionate response to the risk of money laundering6.
Comment – it’s all about balance
Neither of the recent Quincecare decisions were decided in favour of the banks. However, it is clear from Steyn J’s judgment in Quincecare that this implied duty is intended to strike a fair and reasonable balance; it should not impose unreasonable burdens on banks. Additionally, the three recent decisions considered in this article provide helpful and practical guidance on what banks should do to manage their own exposure to suspicious transactions.
- Ensure transactions are properly monitored, in a way that will enable the detection of suspicious transactions.
- Where suspicions of fraud are triggered, these should be escalated and the transaction suspended until the bank has made reasonable enquiries to satisfy itself that the payment instructions are properly made (for suspicions of money laundering the requirements in the Proceeds of Crime Act 2000 should be followed).
- A record should be kept of how and why the instruction was investigated and resolved; demonstrating the reasonable steps taken by the bank to guard against the facilitation of fraud.
- If a bank intends to expressly exclude the Quincecare duty from a banking relationship, it will need to include very clear wording in the contracts governing that relationship (probably in a specifically labelled clause).