Deacons
  April 15, 2021 - Hong Kong, Hong Kong

Banks Not Required to Act as Detectives or Fraud Detectors
  by Deacons

There has been an increasing number of fraud cases, in particular cyber fraud cases, around the world. Some victims of fraud have sought redress from banks for failing to detect the fraud and refrain from processing their instructions by relying on the Quincecare duty (i.e. the bank’s duty to refrain from executing a customer’s order when the bank is put on inquiry that the order is an attempt to defraud the customer), such as in the cases of Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 and PT Tugu Pratama Indonesia v Citibank NA [2018] 5 HKLRD 277. Recent cases in Hong Kong and the United Kingdom confirm that the Quincecare duty is limited to circumstances of attempted misappropriation of the customer’s funds by an agent of the customer, but not where the fraud is perpetrated by a third party on the customer.

Philipp v Barclays Bank UK plc [2021] EWHC 10 (Comm) (Philipp Case)

In March 2018, the claimant Mrs Philipp was a victim of “authorised push payment” fraud (APP fraud). Mrs Philipp transferred sums from her bank account, which the fraudster deceived her into making, in the belief that the monies would be safe and that she was assisting an investigation by the Financial Conduct Authority and the National Crime Agency. The defendant bank (Barclays) had called Mrs Philipp to confirm that she wished to make the transfers and on each occasion, Mrs Philipp confirmed that she wanted to do so. 

Mrs Philipp commenced legal proceedings against Barclays claiming that the Bank had failed to comply with a duty upon it to protect her from the consequences of the payments. Mrs Philipp claimed that Barclays was under a duty to have in place policies and procedures for detecting potential APP fraud and that it had failed to comply with its duty to protect her from the consequences of the fraud. Mrs Philipp’s alternative case was premised on loss of a chance of her recovering the monies on the basis that Barclays should have taken steps to halt payment out by the receiving banks at an earlier point in time. Subsequently, Barclays sought to strike out the claim or enter summary judgment against Mrs Philipp.

The English Court granted summary judgment in favour of Barclays and held that the Quincecare duty, being a common law duty, rested on the more general concept of a bank adhering to standards of honest and reasonable conduct in being alive to suspected fraud. The standard is of the ordinary prudent banker and should only be confined to cases where the suspicion which has been raised is one of attempted misappropriation of the customer’s funds by an agent of the customer. As it is for the bank’s customer to decide how his or her money should be spent, it is commercially unrealistic to expect bank staff to carry out detective work or act as a guardian or a gatekeeper to second guess the customer’s own outwardly genuine instruction.  

Luk Wing Yan v CMB Wing Lung Bank Limited[2021] HKCFI 279

The Plaintiff (Ms Luk) was a customer of the Defendant bank (Bank). Between 2010 and 2013, at the recommendation of Ms Liu, a securities services manager of the Bank, Ms Luk engaged in investments which Ms Luk understood were offered exclusively to the Bank’s staff or employees. The “internal” investment plans promised extremely high returns.

Ms Luk paid money into Ms Liu’s personal account with the Bank so that Ms Liu could invest on behalf of Ms Luk to take advantage of the “internal” investment plans. After the transfers of the investment funds by Ms Luk to Ms Liu, Ms Liu gave to Ms Luk some pages of purported receipts and records issued by the Bank. 

Ms Luk became suspicious of Ms Liu in late 2013 when Ms Liu was late in depositing some of the interest due and failed to repay some of the investment principal. Eventually, Ms Luk contacted the Bank in March 2014 and was informed by the Bank that the Bank had no record of the investments and the purported receipts were fake.

Subsequently, Ms Luk commenced legal proceedings against the Bank relying on negligence on the part of the Bank in handling transfer of funds from Ms Luk’s account with the Bank to Ms Liu’s account with the Bank, i.e. Quincecare duty, breach of contract under the terms of the account opening mandate and/or implied contractual terms, and breach of fiduciary duty as an agent.

The Hong Kong Court found in favour of the Bank and held that the Bank was not liable for the losses sustained by Ms Luk as a result of the fraud perpetrated by Ms Liu. In particular, having considered the Philipp Case, the Court was of the view that the Quincecare duty will only arise in circumstances of attempted misappropriation of the customer’s funds by an agent of the customer rather than by a third party perpetrating a fraud on the customer which induces the payment. The Hong Kong Court was reluctant to extend the duty to include detection of the underlying purpose of the transfers or series of transfers. The Bank is not required to carry out professional standards of detective and investigative work, aimed at establishing whether or not a payment which potentially may have been made in furtherance of a fraud really is suspect. 

As the implied duty of care in carrying out a customer’s instructions under the account opening documents and the fiduciary duty owed by a bank to its customer did not extend beyond the Quincecare duty, Ms Luk’s claims for breach of contract and breach of fiduciary duty also failed.

Commentary

The Courts’ restriction of the scope of application of the Quincecare duty will be welcomed by banks. The above cases provide reassurance to banks that the Quincecare duty is limited to circumstances of attempted misappropriation of the customer’s funds by an agent of the customer, rather than by a third party perpetrating a fraud on the customer which induces the payment (i.e. the situation common in email fraud cases). Where a bank is satisfied that payment instructions it received are genuine, it is not required to take steps to investigate or detect the underlying purpose of the transfer.

However, the decision in PT Tugu Pratama Indonesia v Citibank NA [2018] 5 HKLRD 277, in which the Hong Kong Court held that the Quincecare duty should only be triggered in clear cases and opined that it is not the function of the bank to act as a ‘fraud detector’, has gone on appeal. It is yet to be seen whether the Hong Kong Court of Appeal will take a different approach in relation to the application of the Quincecare duty. 




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