Bankers and the importance of ongoing monitoring

Banks-as-policemen

Speed read: Jonathan Fisher QC analyses the interrelationship between the civil and criminal liability of banks and the consequential establishment of the banks as policemen of money laundering.

Criminal law and civil law are developing in tandem and ensuring that banks play an enhanced role in the prevention of financial crime.

Section 330 of the Proceeds of Crime Act 2002 threatens a banker with five years’ imprisonment if he/she fails to make a suspicious activity report to the National Crime Agency where there are reasonable grounds to suspect that a customer is engaged in money laundering. Section 7 of the Bribery Act 2012, and sections 45 and 46 of the Criminal Finances Act 2017, empower the criminal courts to impose an unlimited fine where a bank fails to take adequate measures to prevent a customer from involvement in bribery or tax evasion.

As for tortious liability, during the last twenty years the civil courts have gradually recognised a developing legal obligation requiring a bank to exercise reasonable care to prevent a director or other company representative from perpetrating a fraudulent ‘smash and grab’ of a company’s assets. The seminal cases of Barclays Bank plc v Quincecare Limited [1992] 4 All ER 363 and Barings plc v Coopers & Lybrand (No 2) [2003] EWHC 461, [2003] EWHC 1319 began a process which culminated in the decision of the Supreme Court a few weeks ago (30 October 2019), in Singularis Holdings v Daiwa Capital Markets Europe Ltd [2019] UKSC 50.

It is a mistake to view the developments in criminal law and civil law in isolation from each other. Rather, the obligations imposed by criminal law serve to frame the extent of tortious liabilities in civil law. The obligations set out in the Proceeds of Crime Act 2002 and the Money Laundering Regulations are paradigm examples of the legal pincer movement at work.

In Singularis Holdings, liquidators of a company sued Daiwa Capital, which had acted as the company’s bank, to recover losses suffered by the company after the company’s 100% shareholder and sole active director (‘the company officer’) had instructed the bank to pay away the company’s assets in a fraudulent manner. The bank sought to resist liability for its failure to safeguard the company’s assets by relying on the company officer’s fraudulent conduct. Applying the line of authority culminating in the Supreme Court’s decision in Patel v Mirza [2016] UKSC 42, the bank contended that the customer’s instructions had been tainted by the company officer’s illegality, and this should relieve the bank of its civil liability. Moreover, as the sole shareholder and active director, the company officer’s dishonest mind could be attributed to the company, and accordingly, the bank had acted in accordance with the company’s instructions.

Rejecting the bank’s defence, the Supreme Court saw matters rather differently. The duty resting on a bank to prevent a customer company from becoming the victim of the wrongful exercise of power by a company officer would be thwarted if the bank’s submissions were correct. The duty struck a balance between the interests of a customer company on the one hand, and the interests of a bank on the other. Denying the claim would not enhance the integrity of the law. Moreover, the Supreme Court held that it was not correct to attribute the actions of the company officer to the company. The company was not a one-man company and there was a board of reputable directors and a substantial legitimate business. No doubt consequent on their level of inactivity, there was no evidence to suggest that the other directors were aware of the sole active director’s misappropriation of company funds. These actions could not be attributed to the company in these circumstances.

Clearly, the Supreme Court’s decision was driven by policy considerations associated with the application of the anti-money laundering regime. Lady Hale, giving the Court’s judgment, noted that “denial of the claim [against the bank] would have a material impact upon the growing reliance on banks and other financial institutions to play an important part in reducing and uncovering financial crime”. Lady Hale added:

“If a regulated entity could escape from the consequences of failing to identify and prevent financial crime by casting on the customer the illegal conduct of its employees, that policy would be undermined” (at paragraph 17 of the judgment).

In this context, considering the key facts in the case within the framework of the anti-money laundering regime, the bank’s deficiencies were stark. As the Supreme Court noted (at paragraph 11 of the judgment), any reasonable banker would have realised that there were many obvious, even glaring, signs that the company officer was perpetrating a fraud on the company. He was clearly using the funds for his own purposes and not for the purpose of benefiting the company. The bank was aware of the dire financial straits in which the company officer found himself, and it knew that the company might have other substantial creditors with an interest in the money. In addition, there was plenty of evidence to put the bank on notice that there was something seriously wrong with the way that the company officer was operating the company account. Apparently, everyone at the bank recognised that the account needed to be closely monitored but no one in fact exercised care or caution or monitored the account themselves and no one checked that anyone else was doing any monitoring.

The lesson for money laundering reporting officers and nominated officers under the Proceeds of Crime Act 2002 is clear. A bank will ignore its customer due diligence and ongoing monitoring obligations at its peril. It is not only regulatory enforcement action, and potentially criminal prosecution, which lie in wait if the niceties of anti-money laundering compliance are not satisfied. There are also consequences in civil law, as a lengthy queue of company creditors may look towards a negligent bank as their best, and probably only source of recovery for losses sustained at the hands of a malevolent fraudster.

This article was originally published as the quarterly comment of the General Editor in Lloyds Law Reports: Financial Crime.