High Court Considers Liability of Receiving Bank in Context of APP Fraud – Financial Services

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The Tribunal de Grande Instance has dismissed an action brought by a company against a bank for knowingly collecting and unjustly enriching funds received by the bank in connection with an authorized push payment fraud (APPLICATION): Tecnimont Arabia Ltd v National Westminster Bank plc [2022] EWHC 1172 (Comm).

This decision will be of interest to financial institutions faced with claims by non-customers seeking to recover funds mistakenly transferred, as part of cyber-fraud, to their customers’ accounts. The decision emphasizes that it will be difficult for non-customers to pursue such claims against a receiving bank where: (a) the transferred funds do not constitute trust property; and (b) the bank has not enriched itself at the plaintiff’s expense.

In this case, the court was satisfied that the bank could not be held liable for knowing receipt, as the property transferred was not trust property. Furthermore, the bank could not be held liable for unjust enrichment since it had not enriched itself “at the plaintiff’s expense” according to the criterion provided for in Investment Trust Companies v HMRC [2017]UKSC 275.

The court pointed out that if it had found otherwise, it would in any event have admitted that the change of position defense was open to the bank. The court noted that the bank would not have discovered (or been warned of the risk) of fraud committed by the customer. It cannot be said that a reasonable person would have appreciated that the transaction was likely fraudulent or would have made inquiries or sought advice that would have revealed the likelihood of fraud.

We examine the decision in more detail below.

Background

The applicant company (Tecnimont) was the victim of APP fraud. Tecnimont intended to make a payment of $5 million to an Italian entity of its group. Shortly after, a third-party fraudster gained unauthorized access to the messaging systems of Tecnimont’s Italian entity via a phishing email. The fraudster then sent emails that appeared to come from the Italian entity’s group vice president of finance, asking Tecnimont to transfer the funds to a bank account that the fraudster had control of (the Recipient account). The receiving account was held with the defendant bank (Bank). Tecnimont, believing that this was a genuine request, asked its bank to transfer the 5 million USD to the receiving account (the Funds transferred).

Once the transferred funds were deposited in the recipient account, the fraudster arranged several international payments from that account over the next two days. By the time the fraud was discovered, the majority of the funds had dissipated.

Tecnimont admitted that it was not a client of the Bank and that the latter had no duty of care towards it. However, Tecnimont sued the Bank knowingly for receipt of assets subject to a trust and unjust enrichment. Tecnimont’s case was that: (a) the funds transferred represented trust property in which Tecnimont had an equitable ownership interest and which it was unreasonable for the Bank to retain; and (b) the Bank had enriched itself at its expense, which was unjust because it resulted from a payment made under an error of fact induced by the fraud of a third party.

The Bank rejected the claim. The Bank’s case was that it received the funds from Tecnimont in a corporate capacity on behalf of its client and changed its position by paying out of those funds on the instructions of its client. At all times he had acted in good faith and had no knowledge or suspicion of fraud.

Decision

The court ruled in favor of the Bank and dismissed the claim. Key issues that may be of broader interest to financial institutions are discussed below.

Know the reception

The court found that the claim for knowing receipt had failed because the transferred funds did not constitute trust property.

Liability for Knowing Receipt

The court noted that the equitable principle of knowing receipt imposes a duty of accountability as a construed fiduciary for assets received by a person in breach of trust or fiduciary duty where the recipient is aware of such breach of trust or fiduciary duty, or otherwise has a state of mind which makes it inadmissible for the recipient to retain the benefit of the receipt.

The Court also noted the principle established in Byers vs. Samba Financial Group [2021] EWHC 60 (Ch) and Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156 that there can be no liability for knowing receipt if the transferred property is not trust property.

The court also pointed out that, in accordance with Twinsectra vs. Yardley [2002] UKHL 12, that a cause of action only exists where the defendant has received or used the relevant money in breach of the trust for its own use.

The present case

The court observed that Tecnimont had refunded the transferred funds by acting under an error induced by the deception of a third party. The court also agreed that the property was not trust property at the time it was received. Moreover, the Bank received the deposit for its client and not for its own account, so there was no valid claim.

Unjust enrichment

The court concluded that the claim for unjust enrichment had failed because the Bank had not enriched itself at the expense of Tecnimont. If this was untrue, the court said that the Bank could invoke the change of position defense anyway.

Unjust enrichment test

The court pointed out that, in accordance with Financial Bank of the City c. Park (Battersea) Ltd and others [1998] UKHL 7, for a claim of unjust enrichment to succeed, it was necessary to establish: (a) that the defendant was enriched (ie benefited from it); (b) the defendant’s enrichment was at the plaintiff’s expense; (c) the enrichment was unjust; and (d) there was no defense available.

If the enrichment was made “at the expense” of Tecnimont

The court held that the Bank had not enriched itself at the expense of Tecnimont. It followed that Tecnimont had no right to restitution of any sum.

The court noted that, in accordance with Investment Trust Companies v HMRC, that there were four ways in which a plaintiff could convince the court that the defendant had been unjustly enriched at his expense (assuming there was a “transfer of value”): (a) the plaintiff and the defendant had direct connections; (b) the plaintiff and the defendant did not have a direct relationship, but the substance of their relationship was such that the law would treat them as direct; (c) the plaintiff and defendant dealt with each other’s property; or (d) the plaintiff could trace an interest in property provided to him by a third party.

The court noted that in this case, the transferred funds had passed through different accounts in the international banking system in order to effect the transfer from Tecnimont’s bank, Saudi British Bank SJSC (SBB), at the bank. Therefore, the transferred funds could not be considered as a “direct” transfer from CFF to the Bank. Moreover, the parties were not dealing directly with each other’s property.

The court therefore considered whether the transferred funds should be considered a scheme or a single transaction on the grounds that it would be impractical to treat them in any way other than a direct transfer. The court concluded that the transferred funds should not be treated as directly transferred from Tecnimont to the Bank, as this would not represent the transactional reality of the transferred funds. To do so would disregard the established way in which international bank transfers are conducted and would inappropriately expand the category of cases of international bank transfers.

Accordingly, the court said the claim for unjust enrichment should be dismissed, but would consider the other aspects of the claim in any event (see below).

Was the enrichment unjust?

The court concluded (on a obiter basis) that she was satisfied that the enrichment had been unjust.

The court said there had been a clerical error on the part of Tecnimont. He had been completely duped into the fraud. Tecnimont agents had at every stage believed that they were acting on a genuine instruction from the Italian entity to pay the money into a bank account at the Bank. This belief was clearly wrong. The court also said that Tecnimont did not run an unreasonable risk of acting on the basis of error.

Did the Bank have means of defence?

The court concluded (on a obiter basis), in the event that its conclusion as to whether the Bank’s enrichment was at Tecnimont’s expense was incorrect, that the Bank in any event had a full defense to the claim. At no time was the Bank’s conduct such that it would be unfair to allow it to rely on the change of position defence.

The court noted that, in accordance with Lipkin Gorman vs. Karpnale [1988] UKHL 12, the established principle that a change of position defense is available to a person whose position has changed so much that it would be unfair in all the circumstances to require him to return or, failing that, to return in full.

The court also noted that, in accordance with Niru Battery Manufacturing Company & Anor v Milestone Trading Ltd & Ors [2003] EWCA Civil 1446, where the payee knows that the payor has paid him the money as a result of a mistake of fact or even a mistake of law, it will generally be inadmissible or unfair to withhold restitution from the payor.

In this case, the court noted that: First, nothing in the design or operation of the Bank’s systems would make it unfair to allow the Bank to rely on the change of position defense. Second, the Bank would not have discovered (nor been warned of the risk) of any fraud committed by the client. It cannot be said that a reasonable person would have appreciated that the transaction was likely fraudulent or would have made inquiries or sought advice that would have revealed the likelihood of fraud. In the court’s view, none of the Bank’s conduct was unreasonable. Third, the cash payment of the recipient account was essentially an automated process. The final transfer was not actively authorized by the Bank and was instead “cleared” by the Bank’s automated processes. In the court’s view, the delay in freezing the Escrow Account was not such that it would be unfair to allow the Bank to invoke the change of position exception.

Accordingly, for all the above reasons, the court ruled in favor of the Bank and dismissed the claim.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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