The last few years in the global financial world have seen a sharp increase in financial frauds, including money laundering.
Financial crime is growing and not reducing. This is despite the well-intentioned focus by regulators and financial institutions alike.
“The burden on regulated institutions is growing and the need to improve the effectiveness and cost efficiency of prevention and detection systems within them continues to be a major effort,” says David Grace, Global Financial Crime Leader for PWC.
The speed at which financial crimes occur is always needed by fraudsters for the purposes of taking absolute control of the proceeds of crime within a short time.
This makes it cumbersome for financial institutions to prevent further damage or even track the proceeds of fraud. More often than not, the proceeds of financial crime get dissipated within a few hours, a few days or a week.
If this happens, the process of obtaining freezing orders from the court over proceeds of a financial crime may be an unyielding long route, to this end, the proceeds of financial crime may have been dissipated before freezing orders are obtained to preserve the proceeds of fraud.
Mareva Injunctions/freezing orders are commonly sought by legal practitioners through court orders for the purposes of freezing a debtor’s assets to prevent them from being taken away or for the purposes of preserving proceeds of financial crime from being dissipated.
The ultimate goal in seeking mareva injunctions or freezing orders is to prevent a defendant, whether innocent or guilty, to an action from dissipating their assets from beyond jurisdiction of a court so as to frustrate a potential judgment.
A letter sent by a private party that provides a financial institution with sufficient particulars and evidence of fraud, and that outlines its legal obligations in the circumstances, can both entice the institution to take the necessary steps to thwart the fraudulent activity as well as afford comfort that any action it takes to enforce the letter’s request were made reasonably and in good faith.
By placing a bank on notice and therefore opening the bank up to various public and private law duties to prevent any further misappropriation of funds, a ‘Mareva by Letter’ can therefore serve as an effective asset preservation tool for victims of fraud.
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The development of the extrajudicial tool commonly referred to in the trade as ‘Mareva by Letter’ (referred to by the Courts of England & Wales as a ‘Freezing Order by letter’) illustrates how much the current global banking climate has changed globally in the past few years.
A spate of case laws and regulations that advocate better corporate governance and cross-border cooperation in the fight against economic crime, in particular money laundering, has resulted in the slow but steady undermining of the stoic and uncritical acceptance of client confidentiality.
The long-aged position of the law is that a bank owes a duty of care to its customers at all times to the exclusion of third parties, thus letters written by third parties to banks, even those evidencing all possible indicators of fraud, were generally disregarded by banks in the past.
Banks generally saw their duty to their customers as paramount – and this approach could have more often than not been taken with the bank suffering little to no adverse effects.
However, recent decisions in Ontario such as Semac Industries Ltd. v. 1131426 Ontario Ltd, and the 2010 Ontario Superior Court of Justice decision in Dynasty Furniture v. Manufacturing Ltd, v. Toronto Dominion Bank (“Dynasty”) have made clear that a bank that knows of a customer’s fraud in the use of its facilities, or has reasonable grounds for believing or is put on its inquiry and fails to make reasonable inquiries, will be liable to those suffering a loss from the fraud.
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By this decision, it appears that a third party can by a letter inform a bank that the proceeds in its customer’s account are gains from unlawful financial activities, once the bank has knowledge of this, the bank will be liable if reasonable steps are not taken to freeze or protect the funds from being dissipated.
In England, while there is as of yet no general duty of care owed by banks to non-customers, the law does recognise third party liability on the basis of constructive trust theories, as established in the often cited House of Lords case of Barnes v Addy, through which banks may be liable in instances where there is knowing assistance or knowing receipt with respect to fraudulently obtained funds.
Similarly, in the United States and Switzerland, bank civil liability to non-customers can be established where there is evidence of the bank’s negligence, recklessness, or aiding and abetting of fraud.
As a result, a letter that advises a bank of fraud or suspicious activity can serve as the basis upon which to establish that a bank had actual knowledge of the fraud or, alternatively, could be deemed a ‘red flag’ sufficient to place the bank on constructive notice of a problem.
By ignoring such a letter, a financial institution would run the risk that liability will be imposed for all activity subsequent to notice being acquired.
Accordingly, while the different jurisdictions have varying requirements for the establishment of bank liability to third parties, actual knowledge of a fraud will necessitate a bank in all circumstances to take certain positive actions, and an intentional disregard of these responsibilities will likely give rise to a cause of action by a third party victim.
The existence of these obligations therefore provides increasing legitimacy and potency to letters that put a bank on notice of its customer’s potential or actual fraud. Its practicality should therefore persuade victims of fraud to turn to such letters as an additional means of combating the potentially devastating effects of fraud.
As well, banks should be aware of their potential liability and be prepared to weigh the risks of ignoring a letter that outlines a case for fraud and react to such letters appropriately.
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