Recent Court decisions highlight the Failure of the Banks to prevent Fraud and reminds them of their Quincecare Duty of Care to their Customers

There is a consequential responsibility on the part of a bank to compensate their customers, based in the principle of Quincecare, who are targets of scams perpetrated by fraudulent brokers when a bank facilitates their fraudulent customer’s financial transactions if there is evidence for believing their instruction is an attempt to misappropriate funds. The judgments in the Supreme Court and the Court of Appeal may provide a route to force the banks to reimburse the victims.

The Supreme Court judgment in Singularis Holdings Limited (in official liquidation) –v- Daiwa Capital Markets Europe Ltd. at the end of October relating to Quincecare duty, that arose in 1992 as a result of the judgment in Barclays Bank plc –v- Quincecare Ltd. which is the implied duty between a bank and its customer that a bank will use reasonable care and judgement when executing its customer’s instructions, including refraining from executing those orders if the bank has reasonable grounds for believing that the order is an attempt to misappropriate funds, provides further clarification as to what actions amount to a breach of Quinecare duty.   This latest case follows the JP Morgan Chase Bank NA –v- The Federal Republic of Nigeria Quincecare case in the Court of Appeal.  Giambrone’s lawyers in the banking and finance team believe that the two judgments open the door to claims against banks when money is moved from the fraudulent brokers account to an off-shore account in an attempt to place the money out of reach.  There is also the possibility that in opening a bank account for a broker that has warning flags against it or has had in the past could, in certain circumstances, also comprise or lead to a breach of Quincecare duty. Giambrone's lawyers will investigate all options that present themselves when attempting to restore our clients' lost funds.

The Supreme Court’s decision in the case involving Singularis Holdings Limited and Daiwa Capital Markets Europe Ltd., the London based subsidiary of a Japanese investment bank and brokerage company, is a stark reminder to the banks that they must activity scrutinise all transactions and not close their eyes to their lucrative customers’ dubious activities, putting their own commercial interests before the prevention of fraud.  The Supreme Court’s judgment reminds the banks of their Quincecare duty and may assist defrauded investors in the recovery of at least some of their lost money from the banks that facilitated the transfer of money from the fraudster’s bank account where there are reasonable grounds for the bank to conclude that there is an attempt to misappropriate funds.  

Daiwa had developed a unique relationship with the owner of Singularis Holdings Limited, a high-net-worth individual, Mr. Maan Al-Sanea, as Singularis was the only customer whose company was owned by an individual as opposed to a financial institution.   Singularis was said to be closely monitored by the bank, however, when the SAAS group, Mr. Maan Al-Sanea’s wider commercial venture, started to default on financial agreements alarm bells began ringing and the Saudi Arabian Markets Authority froze his assets.  The bank began to close Mr. Maan Al-Sanea’s share positions with consent, after which there was a sum of US$200 million remaining in the account which was promptly syphoned off until the bank account was empty.  The Supreme Court held that, in the words of one judge:  “Any reasonable banker would have realised that there were many obvious, even glaring, signs that Mr Al Sanea was perpetrating a fraud on the company when he instructed that the money be paid to other parts of his business operations. He was clearly using the funds for his own purposes and not for the purpose of benefiting Singularis. In making the disputed payments without proper or any inquiry, Daiwa was negligent and are liable to repay the money to Singularis.”

With regard to the application of Quincecare in the JP Morgan Chase Bank NA –v- The Federal Republic of Nigeria, the Appeal Court held that the duty of care does apply and that the three transfers made by the bank on the instructions of its authorised signatories, totalling US$875 million which was allegedly used to pay off corrupt officials of the then Nigerian government should not have been made whilst JP Morgan was “on inquiry” as there were reasonable grounds for believing the transactions concerned were likely to be an attempt to defraud and the transactions should not have taken place until the bank was “off inquiry”.   Nigeria alleges that the fraud reached the highest levels of the government of then-President Goodluck Jonathan (who has denied wrongdoing) and the bank should have realized it couldn’t trust the senior officials from whom it took the instructions.

The implications of the judgment will almost certainly have the effect of sharpening the banks' vigilance globally with regard to suspect transactions, which in turn, may prevent some of the fraudulent brokers from being able to transfer money that has been obtained through scams.  The banks have been forcefully reminded of the duty they owe to protect all parties against fraud and can be held liable for their failure to do so, depending on the circumstances.  Claims against banks can succeed and money may be able to be recovered that would previously have disappeared from sight and become impossible to trace and recover.

If you would like to know more about the possibility of recovering funds lost in a scam from a bank please click here.