Crédit Agricole v Papadimitiou

Privy Council decision goes to the heart of what financial institutions should know about the commercial rationale behind transactions and the source of customers' funds.

This case1 provides important guidance as to the circumstances in which a financial institution may be held to have had notice of impropriety based on its failure to ask proper questions about a financial transaction. The central question was whether Crédit Agricole ("the Bank") had constructive notice of a pre-existing proprietary right to funds which had been used to repay a loan facility. This would mean that the Bank would be unable to defeat a tracing claim brought against those funds by virtue of being a bona fide purchaser for value without notice. In order to determine whether the Bank had notice, the Board was required to consider whether its knowledge of the transaction through which it received the funds was such that it should have made further inquiries, and whether such inquiries would have revealed impropriety, which would in turn have alerted the bank to the existence of an earlier proprietary right.

While each case is decided on its facts, this judgment will be of particular interest to financial services businesses concerning their level of understanding of the source of a customer's funds and the commercial rationale behind structures used in transactions involving those funds. The decision shines a spotlight on what are sometimes perceived as the more difficult areas to interpret in the Jersey Financial Services Commission's AML/CFT Handbook and provides guidance as to what constitutes understanding the 'commercial rationale' of a structure and related transactions. It should give banks and other financial services businesses pause for thought when considering client acceptance procedures, documentation and ongoing monitoring.

Background

The plaintiff, Despina Papadimitiou ("Despina"), is the daughter of Alexandros Michailidis ("Alexandros") and his wife Irene. She also had a brother, Christo Michailidis ("Christo"). Alexandros was a wealthy man and had built up a collection of Art Deco furniture ("the Collection"), although Christo maintained custody of the Collection. When Alexandros died in 1995, the Collection passed to Irene. Christo sadly died in a tragic accident in July 1999. However, until his death he had shared a home and a life with a Mr Robin Symes ("Mr Symes") - the villain of the piece.

Following Christo's death Mr Symes sold the Collection for approximately US$15m. The proceeds were then laundered through the following transactions:

US$4m was paid to a Panamanian company, Xolian Trader Inc ("Xolian") and US$10.4m was paid to another Panamanian company, Tradesk Limited ("Tradesk"), using an account held at LGT bank in Liechtenstein. Of the US$10.4m, US$10.3m was transferred to an account at the Bank through a Liechtenstein foundation called Pataco Foundation ("Pataco"). In turn, these monies were deposited in the Gibraltar branch of the Bank and credited to the account of Lombardi Corporation, a BVI entity incorporated at the request of Mr Symes. In a 'back-to-back' transaction, using the sum held in the Gibraltar branch as security, the Bank's London branch gave another company, Robin Symes Limited ("RSL"), a loan facility for up to US$10.3m which was drawn down and then repaid in full using US$9.8m of the funds held by Lombardi in Gibraltar. The rest of the US$10.3m was used by Mr Symes for his own purposes and was not pursued in these proceedings. In 2001, Christo's family found out about the sale of the Collection by Mr Symes and (unsurprisingly) took the view that it was not his to sell. This discovery sparked a series of legal proceedings, however the relevant claim was brought in Gibraltar to recover the US$9.8m of the proceeds which the Bank had received in order to discharge the loan facility which it had provided to RSL in London. The claim was brought by Despina who, following the death of Irene, had been held to be the rightful owner of the collection.

At first instance Despina sought recovery from the Bank on three bases: (i) her pre-existing proprietary interest (ii) dishonest assistance and (iii) knowing receipt. All three claims failed. The Court found that there could be no dishonest assistance or knowing receipt because, put simply, there was no awareness of any wrong doing or unconscionable conduct. While it was accepted that the Bank had...