Banks Must Conduct Enquiries Into the Underlying Commercial Purposes of Their Clients’ Transactions

Cara North

Following a fraud, victims will commonly attempt to trace the fraudulently obtained property or its proceeds through to third party recipients. A critical question is whether the third party was on notice that the transaction through which they received the money was improper such that it was likely that there existed an earlier proprietary right to the money.  If so, the third party would not be regarded as a bona fide purchaser for value without notice, in order to defeat the claim.  The question of notice and the enquiries required to be made, is of particular interest where the third party purchaser is a bank, which has access to more information and has obligations to detect money-laundering and other criminal activities, over and above that of an average purchaser.

In Crédit Agricole, the Privy Council has provided further guidance and clarification on the circumstances in which banks can be held to have had notice of a fraudulent scheme by failing to conduct enquiries into the underlying commercial purpose of a transaction entered into by their client.

The Board confirmed the decision of the Court of Appeal in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, and clarified and restated the circumstances in which a party can be held to have had notice.

These are:

  • actual notice because it appreciated that a proprietary right in the property probably existed;
  • constructive notice because a reasonable person with the attributes of a bank would have appreciated based on the facts available that the proprietary right probably existed; and
  • constructive notice because it should have made enquiries or sought advice as, if it had done so, it would have revealed the probable existence of such a proprietary right.

It was common ground that the bank was in possession of the proceeds of a fraudulent scheme which Ms Papadimitriou, the victim of the fraud, could trace into its hands, and that her claim would be successful unless the Bank was able to demonstrate that it was a bona fide purchaser without notice of the fraudulent nature of the scheme. The Privy Council held that the Bank had constructive notice of the fraud, on the basis that if it had conducted the reasonable enquiries required of it, the probable existence of the proprietary right would have been revealed.

As to when a bank is obliged to make enquiries, the Board concluded that “if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the proprietary of the transaction” the bank is required to make enquiries (Lord Clarke at [20]). Thus “if there are features of the transaction which if left unexplained are indicative of wrongdoing, then an explanation must be sought before it can be assumed that there is none.” (Lord Sumption at [33]).

As to the type of enquiry a bank must undertake, the Board held that it should not be confined to the source of the funds, but should extend to the commercial purpose of the transaction. In this case, the Board found that upon such an enquiry a reasonable banker would have been aware of the impropriety as the arrangement could not have had any commercial purpose other than money laundering.

This decision serves as a clear reminder that courts are ready to hold banks accountable for not questioning and checking both the commercial purpose of their clients’ transactions and the source of their clients’ funds, even where a bank has no actual notice of any underlying fraud.


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