Transaction Monitoring – Practical Guidance For Financial Institutions From Three Recent Cases

Curbing fraud and money laundering are top of the international regulatory and political agenda. It is widely acknowledged that private financial institutions have a part to play, but the scope of their legal responsibility is not always clear. This article pulls together three recent high-profile decisions which clarify the standards currently expected of banks, in particular, and the financial services sector more generally.

Daiwa v Singularis1 - suspend suspicious payment requests until you have made reasonable enquiries to satisfy yourself that the payments can be properly made (Quincecare duty).

Earlier this month, the Supreme Court dismissed an appeal and held a bank (Daiwa) liable to its customer (Singularis) for breach of its Quincecare duty. Banks have a contractual obligation to perform the authorised instructions of their customers. They also owe a duty of care, not to execute a customer's instruction if the bank knows (or should know) that the instruction is dishonestly given2. This is known as the Quincecare duty of care.

By the time this case reached the Supreme Court, there was no dispute about whether or not a Quincecare duty was owed by the bank. Instead, the bank sought to deflect liability for breach of this duty by demonstrating that the fraudulent mind of the person authorised to instruct the bank (who was also the Chairman, sole shareholder and the “directing mind” of the company), should be attributed to the bank's corporate customer, Singularis. If the court allowed this attribution, the bank hoped to avoid liability by raising the defences of illegality; lack of causation; and an equal and opposite claim for deceit.

The Supreme Court was not prepared to attribute the instructing individual's fraudulent mind to Singularis and held that the proposed defences would have failed in any event. It also explained, obiter dicta, what the bank should have done. In this case it was clear that the bank was aware of the fraudulent intent behind the instructions it received: “…everyone [at the bank] recognised the account needed close monitoring but no one exercised that level of care”. The bank “should have realised that something suspicious was going on and suspended the payment until it had made reasonable enquiries to satisfy itself that the payments were properly made”.

Federal Republic of Nigeria v JP Morgan3 - The Quincecare duty can only be excluded by very clear words.

The Federal Republic of Nigeria (FRN) claims the...