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When could an innocent bank be liable to the victims of fraud?

Written by Guest on Monday, 8 June 2015

Guest bloggers Jamie Humphreys and James Maton discuss the Credit Agricole v Papdimitriou case and when an innocent bank could be liable to the victims of fraud.


  

Jamie Humphreys is an associate in Cooley’s London office and a member of the litigation department. He has a broad range of experience acting for governments companies and individuals on complex commercial litigation disputes, with a recent focus on civil fraud, anti-corruption and asset tracing.

 

 

James Maton is a commercial litigator in Cooley’s London office advising companies and governments on a wide range of complex contractual and commercial disputes. He advises governments seeking to trace, freeze and recover the corruptly acquired assets of dishonest public officials.

 

 

In Credit Agricole v Papdimitriou the Judicial Committee of the Privy Council recently clarified the circumstances where a bank could be liable to a victim of fraud despite an absence of dishonesty on its part. The ruling has potentially wide implications relating to the use of and suspicion raised by, complex layers of offshore company structures to handle transactions.

The case concerned an art deco furniture collection that had been wrongfully sold. The fraudster laundered the proceeds through accounts in multiple offshore jurisdictions and using a range of different corporate structures to hold the funds at each stage, ultimately paid the proceeds into a Credit Agricole account in Gibraltar. The funds were then used as security for a US$9.8m loan to the bank’s London branch. The ostensible purpose of the transaction was to discharge a loan to another bank, and in this way the bank “beneficially received” the funds.

The owners of the furniture collection sued for the recovery of the proceeds of sale. While the fraudster would usually be the primary defendant in this kind of case the bank was the target of their claim. The bank’s defence rested on the argument that it was a bona fide purchaser for value without purchase. The bank claimed it acted in good faith, acquired the assets for value and had no notice of any wrongdoing.

The issue which concerned the Privy Council was what was meant by “notice”. They identified three types of notice:

  1. Actual notice, i.e. you know of the wrongdoing;
  2. Constructive notice, i.e. you should have known of the wrongdoing; and
  3. Another form of constructive notice, i.e. where you should have investigated and discovered the wrongdoing.

The Privy Council’s decision concerned the third category. Two Judges formulated tests for the circumstances that would warrant further investigation:

* Lord Clarke, giving the main judgment of the Privy Council, concluded that “The bank must make inquiries if there is a serious possibility of a third party having [a proprietary right] or put in another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction.”

* Lord Sumption ruled that: “… if there are features of the transaction such that if left unexplained they are indicative of wrongdoing then an explanation must be sought before it can be assumed that there is none.”

The Privy Council found that the bank should have suspected that something was wrong as the stated purpose of the transaction, to repay a loan, did not justify the manner in which it was carried out and the fees charged. The use of a series of offshore jurisdictions and companies to move the funds was indicative of money laundering. As a result, the bank was liable to reimburse the victims.

The ruling is likely to have repercussions for banks that have been unwittingly used as tools for money laundering by the corrupt. In circumstances where they have “beneficially received” the funds, perhaps to pay fees or clear an overdraft or loan, they may be found liable. The transactions took place in 2000, prior to the stricter corruption-resources-corruption-resources-money-laundering regime now in place. Therefore the impact may be felt even more keenly in respect of more recent conduct.

We explore the judgment in greater detail in our briefing here.

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Read 1289 times Last modified on Tuesday, 24 November 2015 11:48

Guest

The TI-UK blog features thought and opinion from guest writers as well as TI staff. Any opinions expressed by external contributors do not necessarily reflect the views of Transparency International UK.

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