Quincecare duty: the role of banks in fighting financial crimeThis article was first published on 28 November, 2019 and appeared in the December 2019 issue of PLC Magazine.
Although the Quincecare duty has existed for around 30 years, Singularis Holdings Ltd (in official liquidation) v Daiwa Capital Markets Europe Ltd is the first case in which it has been found to be breached (see the section below on “Quincecare duty”) ( UKSC 50). The Supreme Court has upheld the lower courts’ decision that a bank had no defence to a claim that it had breached its Quincecare duty of care to its customer.
Daiwa Capital Markets Europe Ltd, the London subsidiary of a Japanese investment bank and brokerage firm, made eight payments totalling approximately $204 million out of money held to the account of its client Singularis Holdings Ltd, a company set up to manage the investments of Saudi Arabian businessman Mr Al Sanea, in circumstances where there were “many obvious, even glaring signs that Mr Al Sanea was perpetuating a fraud on the company” and that he was using the funds for his own purposes and not for the benefit of Singularis.
The instructions to make the eight payments had been given with the approval of Mr Al Sanea, the sole shareholder, the chairman and a director of Singularis. Shortly after the payments were made, Mr Al Sanea placed Singularis into voluntary liquidation. The official liquidators of Singularis brought a claim against Daiwa.
The bank’s failures
The High Court concluded that, in executing the payment orders, Daiwa had breached the Quincecare duty of care that it owed to Singularis ( EWHC 257). In particular, it concluded that any reasonable banker would have realised that Mr Al Sanea was defrauding the company and using the funds for his own purposes, and that there was a failure at every level within Daiwa, a finding that was not challenged in the upper courts ( EWCA Civ 84). The failings included that: Daiwa was aware of Singularis’s severe financial difficulties at the time of the payments; Daiwa was aware that Singularis might have substantial creditors with an interest in the money; there was plenty of evidence to put Daiwa on notice that there was something seriously wrong with the way that Mr Al Sanea was operating the Singularis account; and Daiwa was alive to the possibility that the payments were not for legitimate expenses.
Despite all of this, and despite Daiwa’s head of compliance noting that Daiwa should be cautious about any payments made in and out of the account and should ensure that they related to normal business activities, Daiwa made most of the payments without any investigation and some of the payments after only initial investigations, without reviewing the material received from those investigations. Although the High Court considered that there was a clear breach of the Quincecare duty, it reduced the damages payable by Daiwa by 25% for contributory negligence on the part of Singularis.
No attribution of fraud
The question before the Supreme Court was whether there was a defence for Daiwa on the basis that Mr Al Sanea’s fraud should be attributed to Singularis, given that he was the dominant influence over Singularis’s affairs. If so, Daiwa argued that the Quincecare claim would fail for illegality, causation, or because it would then have a counterclaim against Singularis in deceit. However, the court upheld the Court of Appeal’s decision that Mr Al Sanea’s fraud could not be attributed to Singularis, and therefore that Daiwa’s defence failed.
After considering the authorities, and particularly the controversial decision in Stone & Rolls Ltd v Moore Stephens, the court concluded that the correct approach to the question of whether a fraudulent director’s knowledge can be attributed to a company involves a consideration of the context and purpose for which the attribution is relevant ( UKHL 39). The context in Singularis was Daiwa’s breach of its Quincecare duty of care towards Singularis.
The court noted that the purpose of the Quincecare duty is to protect companies against exactly the sort of misappropriation of its funds as took place in this case; that is, fraud by a trusted agent of the company who is authorised to withdraw money from the account. To attribute the fraud of that person to the company would, in the words of the High Court, “denude the duty of any value in cases where it is most needed”, which, in the court’s view, would be a “retrograde step”.
Implications for financial institutions
The decision shows just how much emphasis the courts are placing on the role of banks and other financial institutions in identifying and preventing financial crime. The scope of the Quincecare duty is yet to be seriously tested, as Singularis involved a clear breach. In particular, there is no clear guidance at this point on how far banks should go to resolve concerns about the legitimacy of payment instructions. However, in practical terms, until further guidance is given, banks and other financial institutions should ensure that they:
- Have in place good systems for monitoring accounts and detecting transactions and instructions that are outside of a client’s usual course of activity. Traditional banks tend to have good systems already but systems may not be as robust at other financial institutions, such as Daiwa, where deposit-taking is not a primary business and money is simply being paid out of a client account.
- Consider a client’s instructions in the context of the client’s current situation and take extra care where there is a heightened risk of funds being misappropriated or the customer being defrauded, for example, when the customer is in financial difficulties (as in Singularis), there is a breakdown in relations between directors or shareholders, or the client has suffered recent security breaches.
- Escalate the matter and investigate appropriately once concerns have been raised about the legitimacy of a client instruction. Any explanations and material received from the client to justify the instruction should be interrogated properly. In Singularis, although Daiwa did inquire into some of the payments, it did not appear to consider the explanations given critically.
- Avoid committing the tipping-off offence under POCA if they have filed a suspicious activity report. Depending on timing, there may be a tension between avoiding tipping off the client and investigating the client’s instructions to satisfy their Quincecare duty. In those circumstances, it is difficult to see how any further inquiries with the client can be made.
- Carefully document any decision to execute an order if the bank has been able to resolve its concerns about the legitimacy of its client’s instructions together with a clear explanation as to why the bank considers that it is no longer “on inquiry”.
In the ordinary course of business, banks are obliged to execute their clients’ instructions promptly. However, the Quincecare duty, which was first articulated in Barclays Bank plc v Quincecare Ltd, obliges banks to refrain from executing a customer’s order if, and for so long as, the bank is “on inquiry”; that is, it has reasonable grounds, although not necessarily proof, for believing that the order is an attempt to defraud the customer ( 4 All ER 363). If the bank executes the order in these circumstances, it may find itself liable for any losses suffered by the customer.