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07 December 2018
In the recent case of PT Tugu Pratama Indonesia (Tugu Pratama)(1), the Court of First Instance considered the extent to which a bank's duty of care owed to its customers, co-existing in contract and tort, requires the bank to make inquiries of suspicious transactions in their bank accounts.
The Judge found in favour of the bank on the basis of expiry of the relevant limitation period. This briefing focuses on the Judge's discussion, by way of obiter, of the bank's duty of care owed to its customers where suspicious transactions occur.
Tugu Pratama is an Indonesian insurance company. Four of its directors fraudulently paid themselves several million US dollars out of a private banking account held by Tugu Pratama, by over 20 payments in four years.
Citing English Court of Appeal authority in Lipkin Gorman v Karpnale Ltd(2), the standard applied by the Judge was whether "a reasonable and honest banker [who] knew of the relevant facts … would have considered that there was a serious or real possibility, albeit not amounting to a probability, that its customer might be being defrauded." If so, the banker's duty is not to process the payment instructions, despite on their face being properly signed, pending a reasonable inquiry into the circumstances.
The Judge considered (obiter) that the expected standard had not been met in the circumstances.
a. First, there was no apparent connection between the payments and Tugu Pratama's business of insurance. Although the directors had been paid remuneration and dividends out of the account previously, they were made less frequently and were lower in value than the suspicious transactions in question. There was also little other activity on the account.
b. Second, even though the payment instructions were on their face properly signed, the payments were made to accounts held by the directors in their own names, and the directors themselves provided the instructions for the payments.
c. Third – the factor described as the most powerful of the three by the Judge – the pattern of the payments was suspicious, including that funds were paid out of the account within weeks of being received.
Importantly, the Judge accepted that a suspicious pattern would have emerged upon the third of the transactions in question, noting that the first three transactions took place within six months.
The Judge held that these factors, when viewed in isolation, might not have been enough to warrant suspicion, but when put together they were sufficiently indicative of fraud. Nevertheless, because Tugu Pratama's internal governance had for years failed to prevent its own directors' fraud or identify the loss of funds, he indicated that he would have found it liable in contributory negligence for its losses.
This case is a helpful reminder of what the law expects of banks in spotting red flags when processing instructions:
a. the payees' identities, for example where the payees are directors of the corporate client;
b. any apparent connection between the payments and the customer's business;
c. the size and frequency of the payments; and
d. the fund flows surrounding the payments.
Our disputes practice often handles claims of this nature. Please feel free to contact us if you wish to discuss.
For further information on this topic please contact Fai Hung Cheung, Matt Bower, Simon Clarke or Stuart Rau at Allen & Overy LLP by telephone (+49 69 2648 5000) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Allen & Overy LLP website can be accessed at www.allenovery.com.
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