Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
THE HONOURABLE MR JUSTICE COLMAN
Between :
HOSNI TAYEB | Claimant |
- and - | |
(1) HSBC BANK PLC (2) AL FOURSAN INTERNATIONAL COMPANY | Defendant |
Mr Nicholas Elliott QC and Michael Lazarus (instructed by Messrs Farrer & Co) for the Claimant
Mr Jeremy Cousins QC and Mr Stephen Eyre (instructed by Messrs DG Solicitors) for the Defendant
Hearing dates: 21, 22, 26, 27 and 28 April 2004
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
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Colman J.
Mr Justice Colman:
Introduction
This case raises for decision for the first time issues of great importance in relation to the operation of money transfers by means of CHAPS – the Clearing House Automated Payment System. In particular, it is concerned with the manner in which a bank should respond to CHAPS transfers into a customer’s account when it suspects that the money is the proceeds of fraud or the transfer is for the purpose of money laundering and where the bank is therefore concerned that it may be at risk of committing an offence under section 93A of the Criminal Justice Act 1988 or may sustain liability as constructive trustee.
The Claimant had a Tunisian passport and he had no permanent address in England. He did have various members of his family who lived in Derby. He has a degree in architecture and a profession as an architect but his business interests also lie substantially in the field of information technology. He owns and controls the second defendant, a private company incorporated in Tunisia. He personally, and that company respectively, own and manage the top level internet domain name “.ly” which relates to Libya. In that connection, in 2000 he owned a database of registered internet names ending in “.ly”. Anyone who wanted to use any of those names had to pay a fee to the Claimant.
In 2000 he was negotiating a transaction with the Libyan Corporation General Posts and Telecommunications Company (“GPTC”) under which he was to sell and it was to purchase the database. In anticipation of finalisation of negotiations completion of the sale he opened an instant saver account at HSBC’s branch in Derby. On 21 September 2000 Mr Eshhati, who had been representing GPTC in the negotiations, caused Barclays Bank, Westminster branch, to transfer by CHAPS to the Claimant’s account at HSBC, Derby some £944,114.27, then the sterling equivalent of US$1.5 million which was the consideration for the sale of the data base. This sum arrived automatically that day at HSBC, Derby, at 13.57. The HSBC District Service Centre at Birmingham then authenticated the sort code and customer account number and, having done so, at 14.03 HSBC activated the logical acknowledgement (“LAK”) which had the effect of informing Barclays Westminster that the transfer had been received and credited to the Claimant’s account.
Later that afternoon the Claimant had a meeting with Eshhati and representatives of GPTC in the course of which he handed over the database and completed the transaction on the assumption, as I infer, that the CHAPS transfer which he knew had been effected by Eshhati had the effect of crediting his account at HSBC that day with the amount of the price.
In the meantime, and before effecting the CHAPS transfer, Barclays Westminster had informed HSBC Derby of Eshhati’s request for a transfer by CHAPS to HSBC. The Assistant Manager at Derby, Mr Wigham, at once became suspicious of the nature and origin of such a large sum. At 16.14 that afternoon, without reference to the Claimant, he ordered a marker to be put on the Claimant’s account, which had the effect of preventing automatic withdrawals or any other operations of that account without HSBC’s approval. In effect, that meant his approval.
On the following day a meeting took place between the Claimant and Mr Wigham in the course of which it is common ground that Mr Wigham asked the Claimant to explain the transfer. There are stark differences between the evidence of the Claimant and of Mr Wigham as to what passed at that meeting. I consider that evidence later in this judgment. In the event, a short time after that meeting, Mr Wigham caused the £944,114.27 to be re-transferred by CHAPS to Eshhati’s account at Barclays Westminster. He was not satisfied with the explanation given by the Claimant. There is an issue as to whether he had told the Claimant that this would be done. There is no issue as to the fact that this transfer was without the Claimant’s consent. At the same time as the re-transfer occurred Mr Wigham caused the Claimant’s account to be closed and the credit balance of £10 to be transferred to HSBC’s unclaimed balances account. He also cancelled the interest which had been automatically credited to the account for the period 21-22 September 2000 during which the sum transferred by CHAPS was credited to the account.
It is common ground that the circumstances surrounding the transfer to the Claimant’s account justified HSBC in being suspicious. It is also now accepted by HSBC that the origin of the payment was completely innocent and honest. The facts of this case do not raise any suggestion that the Claimant’s dealings with the bank or any other party were in any way dishonourable or dishonest.
The Claimant now claims against the bank in debt in respect of the money transferred to his account by CHAPS. He runs an alternative case to the effect that the bank was in breach of its contract with him in removing the money from his account and transferring it back to Barclays. The bank maintains that its suspicions justified its conduct. Ordinary banking practice entitled it to act as it did. The course which it took, although not the procedure prescribed in cases of suspicion by section 93A of the 1988 Act or by the Money Laundering Regulations or the Money Laundering Guidance Notes, was justified by ordinary banking practice. Not only was there the risk of committing an offence under the 1988 Act if the money were not re-transferred, but there was also the risk of being held to be liable as a constructive trustee if the funds were the product of a fraudulent transaction.
The primary underlying issue is whether the CHAPS transfer to HSBC followed by its authentication and logical acknowledgement (LAK) and the crediting of the amount to the Claimant’s account created a debt due from HSBC to the Claimant or, whether, as the bank contends, it remained throughout in sufficient control of the fund to be entitled to cancel the transfer and re-transfer those funds to Barclays.
The CHAPS System
Although the system has been changed in certain respects since 2000 when the events of this case occurred, the questions raised by these proceedings are pertinent also to the present CHAPS system. As described in Ellinger, Lomnicka & Hooley: Modern Banking Law, 3rd Edn, p480:
“CHAPS Sterling commenced operation as a same day value electronic sterling credit transfer system in 1984. CHAPS replaced Town Clearing whereby high value cheques drawn on a City of London branch of a participating bank and paid into a City of London branch of a participating bank would be cleared on the same day. In 1996 CHAPS Sterling converted to a real time gross settlement system. This means that payments clear during the day on which they are made, within a short period after the payer’s bank issues the payment instruction, rather than by netting off against all other relevant payments at the end of the day.”
The immediate clearing of such payments is an extremely important advantage of CHAPS because it enables transactions involving the transfer of property, including foreign exchange and securities, to be completed on the same day. There is, as between a transferee bank and its transferee account holder, normally a crediting of the customer’s account immediately following electronic acknowledgement of receipt of the transfer.
Both HSBC and Barclays were CHAPS settlement members and as such were bound by the CHAPS Rules. I shall refer to these Rules in more detail later in this judgment. It is important to note that payments under the system were required to be:
“an irrevocable guaranteed unconditional sterling payment for settlement in real time across Members’ settlement accounts at the Bank of England.”
Further, by sending a LAK each member agreed, after authentication, to give same day value to its payee customer.
The CHAPS system works in the following manner:
CHAPS settlement members are provided with special computer software known as gateways. The gateways handle all communications between participating banks and security. The gateways are linked to and accessible from the member’s own internal computer system and they can communicate with the gateways of other participants over telecommunications links.
A critical feature of CHAPS is that every payment is settled across the payer’s bank’s and the payee’s bank’s accounts at the Bank of England before any payment notification is sent to the payee’s bank. The sequence of events is as follows:
The payer’s bank initiates a payment instruction on its computer system.
The payer’s bank’s computer system causes a settlement request to be sent to the Bank of England. This includes details of the payee’s bank and account number.
If there are sufficient funds in the payer’s bank’s account at the Bank of England, the payment is settled by the Bank of England by debiting the payer’s bank’s account and crediting the payee’s bank’s account.
The Bank of England sends a confirmation of settlement to the payer’s bank.
On receipt of confirmation from the Bank of England, the payer’s bank’s gateway automatically sends a payment message to the payee’s bank.
On receipt of the payment message the payee’s bank immediately transmits a logical acknowledgement (“LAK”) to the payer’s bank. This follows authentication, but at HSBC that did not occur automatically if the amount transferred was over £50,000.
Mechanisms exist to ensure that inter-bank settlement can take place even where there is a temporary shortage of liquidity. However, in every case such settlement occurs before the payee’s bank receives any notification of the payment.
The Facts
Early in 2000 the Claimant having commenced negotiations with GPTC for the sale to it of the database relating to the domain name “.ly”, it was agreed that payment of the price of US$1.5 million was to be made to the Claimant in England. It was the Claimant’s evidence that he wanted payment to be made in England because he believed the money would be more secure and because he had friends and relatives in England and intended to educate his children in this country and to live here. His brother-in-law, Kareen Al Basha, (“KAB”) lived in Derby. He ran a small hotel. He advised the Claimant to open a bank account at HSBC into which the proceeds of sale could be paid.
On 10 April 2000 the Claimant went to the HSBC sub-branch at Alvaston, Derby. He was accompanied by KAB who spoke much better English than the Claimant and was an existing customer of HSBC. The Claimant told Lesley Cope, a clerk at that sub-branch, that he was a self-employed architect, earning what she understood to be £20,000 per annum, but according to the Claimant’s evidence, he told her he earned 20,000 Tunisian Dinars per month, which is about £120,000 per annum. There appears to have been a misunderstanding due to the Claimant’s very poor English. The Claimant asked if he could open a business account at HSBC. He told Lesley Cope that he was expecting to receive a large sum of money derived from the data base sale.
She consulted a senior clerk at the sub-branch, Mr Robert Aldred, and he expressed concern about the opening of a business account because of the opportunity it provided for money laundering. The Claimant was a Tunisian national not permanently resident in this country. Mr Aldred suggested that a savings account should be opened, as it would not provide a card withdrawal facility and could therefore be more effectively monitored by the bank. The Claimant was therefore told that he could open an Instant Savings Account. This he did by depositing £10 that day. The account opening procedures were completed on the following day when formal authorisation was signed by Mr Chris Wigham, an assistant manager at the Derby branch.
No further use was made of the savings account until 21 September 2000. The events of that day are of some importance but the Claimant’s evidence in certain respects conflicts with that of the bank’s witnesses.
According to the Claimant, after several months of negotiations with Mr Eshhati, on behalf of GPTC, the sale of the database was ready to be completed by mid-September 2000. On 14 September he received a bank draft for US$1.5 million drawn on Suez Canal Bank. He then telephoned HSBC in London and told a woman employee that he was about to effect a transfer to his account and asked her how long it would take for the amount of the draft to be credited to his account. The conversation had to be conducted through an English-speaking friend. He wished to know when he could hand over the database under the sale agreement. He was advised that the process for that draft could take three weeks because the issuing bank was in Egypt. Not having appreciated that it would take as long as that, he then asked her to advise him as to the fastest method of getting the money into his account. She suggested using SWIFT which guaranteed payment on the same day.
The Claimant then explained the problem to GPTC who agreed to use that method.
The draft on Suez Canal Bank was cancelled on 19 September and GPTC transferred US$1.5 million into the account of Mr Eshhati at Barclays Bank Plc, Victoria Street, London. The sterling equivalent on that date was £944,114.23. The transfer of the database by physical delivery to GPTC in London was to take place on 21 September. The Claimant said in evidence that on the morning of that day he and Mr Eshhati went to Barclays Bank, Victoria Street to confirm that Mr Eshhati's account had been credited with £944,114.23. There they spoke to a Mrs Matthews. She confirmed that Mr Eshhati’s account had been thus credited and then Mr Eshhati instructed her to effect transfer that day to the Claimant’s savings account at HSBC by CHAPS. According to the Claimant, in the course of that visit Mr Eshhati signed a CHAPS transfer form instructing Barclays to effect transfer. Then he and Mr Eshhati went to HSBC’s Victoria Street branch, a few minutes walk away. The purpose of that visit was, according to the Claimant, to confirm that the Claimant’s account had been credited with the transfer. That visit took place between 1.30pm and 2.30pm on 21 September. The Claimant’s evidence was that it was then confirmed by HSBC that the funds had been transferred to his account. He then went to a meeting at the Churchill Hotel to meet the representatives of GPTC and their solicitor. He was handed a document which was signed on behalf of GPTC which evidenced the terms of the agreement. It was titled, Domain Transfer Agreement. It recites that the agreement was made in London on 21 September 2000, between Al Foursan (the second defendant) and GPTC and that the parties made their agreement against the payment of US$1,500,000, which had already been received by Al Foursan. The agreement made provision for the transfer of the database material to GPTC. It was signed by the Claimant and those representing GPTC.
It was put to the Claimant in cross-examination that when he and Mr Eshhati left Barclays for HSBC Mr Eshhati had not yet signed the CHAPS transfer instruction because they had gone to the local HSBC branch to enquire about more favourable interest rates. The Claimant adamantly denied that this was what happened. The basis of that cross-examination was the unchallenged evidence in the witness statement of Robert Eyre at the time a Branch clerk at the Victory Road branch of HSBC at Derby. This referred to a telephone conversation which took place on 21 September 2000. That conversation is said by Mr Eyre to have been accurately recorded in a telephone note made by him that day describing a call received from Ms Matthews of Barclays, Victoria Street, London, branch, advising that she had taken written instructions so far unsigned from Mr Eshhati to remit£1 million, the funds only having been received in US dollars the previous day. Because the Claimant’s account at HSBC was only Instant Access (by which I infer she meant to refer to the very low interest rate on such an account) she had tried to open an account for him at Barclays but, although his passport was in order, such an account could not be opened because he was non-resident. Having asked for the reasons for transfer of funds, she had been told it was for a business deal and she had been offered supporting documentation which she had not yet seen. The transfer had not yet been signed at the time of the telephone call. She thought they (the Claimant and Mr Eshhati) had gone to a “local HSBC” to discuss better interest/accounts. She believed the Claimant was leaving the country that morning. The note concludes with the note “Action: Await call from Barclays if TT proceeding”.
A manuscript notation on the telephone note records that the Claimant had arrived at the Victoria Street branch and had been told “we would not undertake any transaction”.
There is no doubt whatever, that by 13.57 on 21 September Mr Eshhati had signed the CHAPS transfer instruction form at Barclays Victoria Street branch. I infer that the Claimant and Mr Eshhati must later that morning have returned to Barclays after their visit to HSBC and that Mr Eshhati then signed the form. I do not accept the Claimant’s evidence that the visit to HSBC that morning was to ascertain that the transfer had already been completed. I infer that, having been advised by HSBC on 14 September that a CHAPS transfer took effect on the same day, when on 21 September the Claimant and Mr Eshhati returned from HSBC to Barclays to complete the transfer instructions and these were accepted by Barclays, the Claimant assumed that his account would indeed be credited by the time he handed over to GPTC the database in the course of the meeting which was arranged for later that afternoon.
The transfer by the CHAPS system via the Bank of England was received by HSBC at its Victory Road, Derby branch at 13.57 on 21 September 2000. It was then automatically acknowledged to Barclays by the LAK electronic method.
Because the amount was over £50,000 it was required to be authenticated manually by a member of staff at HSBC’s Birmingham District Service Centre. This involved checking that the sort code and account number were those which applied to the Claimant’s account. This procedure had been completed by 14.03 that day and at that time the member of staff concerned activated by computer the crediting of the Claimant’s account.
That process of crediting the Claimant’s account led to the credit balance as shown on HSBC’s internal computer screens being increased by £944,114.23. This balance would not be visible on external card-operated screens until the next day. Overnight batch processing would cause the transfer payment to be included in the credit balance visible on such screens on the next morning and that would have enabled the card to be used for cash drawdown had the bank taken no further action..
In the meantime, if at any time from 14.03 on 21 September the Claimant had applied in person at any HSBC branch or by telephone to any HSBC call centre and enquired as to the credit balance on the account, he would have been informed that the transfer had been included in that balance and he could have withdrawn from the account on that basis. That, at any rate, was the position until 16.14 on 21 September. At that point Mr Wigham caused an inhibit marker to be placed on the account. This had the effect of freezing it. In other words HSBC, while continuing to credit the funds transferred from Barclays to the account, would not accept any payment instructions in respect of the account.
The circumstances in which the marker was placed on the account were, according to the evidence of Mr Wigham, as follows.
He had a gut feeling that the transaction did not seem right. Either this might be money laundering or the money was being used for an improper purpose. He did not, however, report it to the money laundering compliance officer or to his immediate supervisor. However, as he had subsequently discovered, one of his colleagues whom he could not name had made a telephone call to the fraud department. That was not the same as the money laundering compliance officer’s department. He was unable to say what the result of that call was. He did not consult any of the bank’s specific internal procedural manuals on what to do if money laundering were suspected.
On 22 September 2000 the Claimant went to Manchester to investigate the University facilities having in mind that his brother might study there. While in Manchester he called at HSBC’s King Street branch and attempted to withdraw £5,000 from his account. He explained this by stating that he attended at that branch to confirm the arrival of the funds in his bank account. He was advised that he could not draw funds there but would have to go to the London Road branch in Derby for that purpose. He arrived at that branch on the same afternoon and saw Lesley Cope. She confirmed to him that the transfer had gone through to his account but told him that in view of the large amount of the transfer Mr Wigham wanted to see him at the Victory Road, Derby branch. According to her evidence, she had telephoned Mr Wigham to ask what to do about the Claimant’s request to withdraw funds. The account remained subject to the marker placed on it the previous day. The Claimant went to the Victory Road branch. He was accompanied by a friend who spoke better English than he did, one Yousef bin Mohammed Al-Hadi Suleiman, whom the Claimant invited to join the meeting with Mr Wigham when the Claimant felt that he could not adequately understand Mr Wigham’s English.
There is a major conflict in the evidence between the Claimant and Mr Wigham as to what passed at the meeting. According to the Claimant Mr Wigham wanted to know the nature of the transaction which had given rise to the transfer and the Claimant explained it to him and produced the agreement bearing the signatures of the GPTC representatives and of himself. He also produced a copy of Mr Eshhati’s CHAPS transfer order dated 21 September. He said that as these were his only copies, Mr Wigham took photocopies and returned to him the originals. According to the Claimant, Mr Wigham seemed to be satisfied with that explanation and at no time informed him that HSBC proposed to return the funds to Barclays. This account of events is supported by the written evidence of Mr Yousef in a witness statement of 9 September 2002 and another statement made on 11 October 2002.
According to Mr Wigham, having considered HSBC’s position in advance of the Claimant’s arrival, he wanted to be convinced that the transaction was genuine before he would be prepared to allow the Claimant to have access to the funds. When the Claimant arrived, he therefore asked for an explanation as to the source of the funds. The Claimant then explained that the funds came from a contract that was yet to be completed with GPTC. A draft contract was produced. It was on plain paper and unsigned. It was about 13-14 pages long and was not the document described by the Claimant in evidence as the agreement of 21 September 2000. When Mr Wigham asked to be permitted to photocopy it, the Claimant told him that it was confidential and not yet signed. At that point Mr Wigham left the meeting, stating that he was going to refer the matter to a senior colleague. No senior colleagues were available to be consulted at the time and he discussed the problem with Mr Aldred, a junior colleague who had been present at the meeting. Mr Wigham telephoned HSBC’s central fraud office. He stated that he remained concerned that the transaction involved fraud or money laundering. He was advised by Linda McGuchan of that office that as the person concerned was the customer before him he had to take the final decision. He then returned to the presence of the Claimant and told him that he was uncomfortable about the situation and the source of the funds. Accordingly, he would be returning the money to Barclays for the credit of the Payer. Up to that point the Claimant had been unaccompanied, but he then asked if another person who had been waiting in the reception area and who spoke better English could join them. That person joined the meeting and when Mr Wigham stated that he needed to know the source of the funds the other person said that the funds were commission on the contract which had not yet been signed. Mr Wigham then told them that he remained unhappy and was going to return the money to Barclays. He stated in evidence that he repeated this several times, the Claimant’s friend asked him why and that he was absolutely certain that the Claimant himself understood that this was to be done. After this intention had been repeated on several occasions, the Claimant left the meeting and was “a little agitated” that the funds were to be returned.
Mr Wigham said in evidence that in view of his continuing suspicions he saw it as his duty to return the money as a matter of banking practice based on his 35 years experience in the bank.
Following that meeting at 14.44, the bank returned the funds to Barclays.
This was done by means of a CHAPS transfer form which was certainly not designed for this purpose. It was headed “Customer Request/Authority to Remit Funds”. It was signed by Mr Wigham, who described himself as the Assistant Manager of the Victory Road branch, under the rubric “Please make the above payment out and debit my/our account”. This was faxed to HSBC’s District Service Centre at 14.09. It was then transmitted through the CHAPS system and the money found its way back to Mr Eshhati’s account at Barclays. Interest for one day was initially credited to the Claimant’s account, but, according to Mr Wigham, was cancelled on the basis that HSBC had never accepted the transfer. Thereafter, on 28 September 2000 Mr Wigham closed the Claimant’s account and transferred the £10 credit balance without interest to the bank’s unclaimed balances account. HSBC issued no written notification to the Claimant that it had returned the transfer to Barclays. Nor did it inform him that it had closed the account and removed from it the pre-existing credit balance of £10 without interest and had first credited the account with one day’s interest on the total credit balance after the transfer and then cancelled the interest.
The Claimant returned later that afternoon with his brother-in-law to the Alvaston branch and once again attempted to make a withdrawal from his account. Lesley Cope declined that request and again referred him to the Victory Road branch. The brother-in-law became vociferous, but they then left. It is unclear whether this was before or after 14.44. It was certainly before 15.30 when the branch closed.
The evidence as to events following 22 September 2000 has some bearing on how the conflicts of evidence between the Claimant and Mr Wigham can be resolved.
After the re-transfer to Barclays had been effected the money went back into a savings account of Mr Eshatti. On 27 September he drew on that account a draft payable to the Claimant in the sum of £944,114.23. However, on 29 September 2000 the money was re-transferred back to Mr Eshhati’s account and on 3 October 2000 he transferred a larger sum (£1,034,554), which obviously was mainly composed of £944,114.23, to another account under an Arabic version of Eshhati’s name. The Claimant gave no explanation for these banking operations. However, I infer that by 27 September 2000 Mr Eshhati knew that the Claimant had not been credited with the £944,114.23 and I further infer that he had been given this information by the Claimant. It follows that when the Claimant left the meeting with Mr Wigham on 22 September 2000 he had understood that the funds were to be retransferred to Barclays. I therefore reject the Claimant’s evidence that Mr Wigham did not tell him that this was to happen.
There was no further contact between the Claimant and HSBC until 25 July 2002, some 22 months after the meeting with Mr Wigham. On that day the Claimant returned to the Alvaston branch. He said that this was to confirm that the funds were in his account. He said that he then learned for the first time that the bank had closed his account in 2000.
Having regard to my findings at paragraph 33 above, I reject the Claimant’s evidence that when he visited the bank in July 2002 the information that the funds had gone back to Barclays came to him as a great shock. This is further demonstrated by the conversation which subsequently took place at a meeting between the Claimant and Mr Wigham on the same day in the course of which the Claimant told him that he was expecting to receive the US dollar equivalent of £7.5 million under another deal he was negotiating relating to computer parts and software. Mr Wigham having consulted the money laundering reporting office at HSBC told him that such a deposit would be accepted on the account. On the following day Mr Wigham informed the Claimant by fax that the £7.5 million would be held in the Claimant’s account “until further instructions are received from yourself”. In the course of that meeting the Claimant threatened to take legal action against the bank unless the account was re-opened and the £10 re-credited. The bank thereupon re-opened the instant saver account with a balance of £10. No interest was credited to it. The Claimant’s conduct in advising the bank of a further deposit is in my judgment inconsistent with his having been informed for the first time of the re-transfer. I conclude that such information came as no surprise to him: it simply confirmed what Mr Wigham had said he would do on 22 September 2000.
On 27 July 2002 the Claimant telephoned Mr Eshhati and asked him to recover the monies which had been re-transferred. He was told that the monies had been returned to GPTC and that it would be impossible to recover them. Apparently, the Claimant took no further steps to recover the monies and he made no direct contact with GPTC. The position therefore appears to be that GPTC have received delivery of the domain name database but, having initially remitted the price to HSBC, have, by the re-transfer, received a windfall payment equivalent to the price. There is no evidence that the Claimant has taken any further steps to recover the funds.
Submissions
On behalf of the Claimant Mr Nicholas Elliott QC submits that from the moment when HSBC completed the electronic processing of the payment of £944,114.23 by sending the LAK and carrying out authentication verification on or before 13.57 on 21 September 2000, it became indebted in that amount to the Claimant and that no subsequent event released it from that indebtedness. This was immediately prior to the carrying out of HSBC’s District Service Centre of verification of the sort code of the Derby branch and that the account number referred to in the transfer was that of the Claimant’s account. The placing of the marker on the account at 16.14 that day left the debt intact. It simply informed the bank’s personnel and computer system that they should not repay it or any part of it upon the depositor’s compliance with the withdrawal procedures, such as presentation of the passbook over the counter at a branch.
The bank’s argument that it had never accepted the transfer was misconceived. In as much as it had opened a bank account for the Claimant into which electronic same day payments could be made, it had agreed in advance that his account could be credited in accordance with CHAPS procedures. For this purpose, the bank needed to do no more than transmit the LAK. The bank’s further argument that, following receipt of the CHAPS transfer, it became the agent of Barclays, although true up to the moment of the transmission of the LAK, could not be correct after that had occurred. The proposition that HSBC had a period which extended beyond the transmission of the LAK in which to consider whether to accept the transfer as creating a debt from it to its customer was inconsistent with its crediting the customer’s account immediately upon completion of verification and transmission of the LAK.
Further, the bank’s argument that, on the authority of the judgment of Kerr J. in Momm v. Barclay’s Bank International [1977] 1 QB 790, it had until the end of the value date to decide whether to credit the customer’s account and that in this case it had decided by 16.14 on that day to place a marker on the account and had therefore declined to make the funds available, did not avoid the consequences that a debt had already been created by the CHAPS procedures which had caused the Claimant’s account to be credited before the decision to place a marker on it and that marker had not divested the credit balance.
For the bank, it was submitted that there is nothing about the CHAPS system and no term of the banker/customer relationship which requires a banker to accept monies transmitted via CHAPS about which there is a genuine suspicion. Good banking practice set in the context of sections 93A to 93D of the Criminal Justice Act 1988, as amended in 1993, and the statement “Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering” issued in December 1988 by the Basle Committee on Banking Regulations and Supervisory Practices supported this analysis. Specifically it was submitted that the 1988 Act did not impose on banks a reporting obligation, but merely provided a statutory defence by the reporting facility if a bank should entertain suspicion of money laundering. Thus, it would be an offence to receive, or retain in an account, money as to which the bank was suspicious. A bank is not required to put itself in the position where it is obliged to rely on a statutory defence to what would otherwise be criminal conduct.
Further, no debt could be created in favour of a customer unless and until the bank decided to accept a payment as such and represented that it did so. The reasoning of Hobhouse J. in TSB Bank of Scotland v. Welwyn Hatfield DC [1993] 2 Bank. LR 267 in respect of the need for there to be acceptance by a creditor of a tender of payment as discharge of a debt applied equally to acceptance of payment by a bank as creating a new debt. There was no special rule applicable to electronic funds transfer (“EFT”). The general principle was set out in the following passage from Paget’s Law of Banking, 12th Edn, at section 17.2.08:
“Mere receipt of funds by the beneficiary’s bank is not enough to constitute payment. It is the beneficiary’s bank’s decision to accept those funds for the beneficiary’s account which is vital. The bank may have good reasons for not making that decision. The payment order may not adequately identify the beneficiary, or the bank may wish to check that it has the beneficiary’s authority to accept the payment, or the bank may be concerned that it will break the law by crediting the beneficiary’s account, eg. where regulations prohibit credits being made to the accounts of certain foreign nationals. Until the beneficiary’s bank reaches its decision to accept the funds for the beneficiary’s account, it holds those funds as agent for the originator and not for the beneficiary. The funds constitute an unaccepted tender by the originator and not discharge of the underlying money obligation between the originator and the beneficiary. Of course, the beneficiary’s bank must be aware that the funds have been transferred for the account of a particular beneficiary, if it is to accept them on that beneficiary’s behalf. In Royal Products Ltd v. Midland Bank Ltd, it was held that a transfer of funds from a customer’s account with one bank to its account with another was complete only when the funds were available to the other bank and it was notified for whose credit they were to be held.”
Mr. Cousins QC further supports this point by reliance on the decision of the House of Lords in The Chikuma [1981] AC 314 to the effect that an obligation of charterers under a time charter to pay charter hire by a particular date “in cash” was not satisfied in circumstances where on the date in question the shipowners’ bank had received a transfer which had been credited to the shipowners’ account on the relevant date but could only be drawn down on that date subject to an interest charge. Reliance is placed on the analogy with a case such as the present where the funds were not freely disposable by the bank’s customer because of a marker. The marker was in place by the end of banking hours on 21st September and therefore, applying Momm, supra, no debt existed as between bank and customer by that day’s deadline. Sutherland and Sutherland v. The Royal Bank of Scotland [1997] 6 Bank LR 162 is relied on for the proposition that in EFT the bank’s facility to reverse entries continued until the close of banking on the value date as held in Momm.
Discussion
It is first necessary to consider the relevant CHAPS Rules applicable at the time (they have subsequently been amended). These included the following provisions:
“ CHAPS CLEARING TIMETABLE
ITEMS FOR REPAIR SORTING CODES
By 12.00 Noon next business day. To be applied or returned to Payer Settlement Member, as soon as practicable but in any case no later than 12.00 Noon the next business day.
WRONGLY DELIVERED PAYMENTS
By 12.00 Noon next business day. To be applied or returned to Payer Settlement Member, as soon as practicable same day but in any case no later that 12.00 Noon the next business day.
WEEKLY RETURN OF NUMBER AND VALUE OF CHAPS PAYMENTS
Tuesday
(1) GENERAL
(a) A Clearing is to take place on each business day in England and Wales for the electronic exchange of CHAPS payment messages between the CHAPS Settlement Members.
In normal operation CHAPS payments are settled in real time across settlement accounts, maintained by Members at the Bank of England. The operation of these accounts and the settlement account movements associated with CHAPS payments are governed by the Bank of England’s Reference Manual and Mandate Agreement.
CONSTRUCTION OF RULES
(h) CHAPS Rules shall be construed in accordance with the laws and banking practices (including days of business) of England and Wales.
(2) CHAPS PAYMENTS
Payments to be included must:
(b) Be an irrevocable guaranteed unconditional sterling payment for settlement in real time across Members’ settlement accounts at the Bank of England.
(d) Be time-stamped by the Payer Settlement Members’ Gateway before the end of the Settlement Period, excepting contingency situations set out in the CHAPS Procedural Documentation.
(3) PAYMENTS EXCLUDED
(b) One which is conditional or requires the transaction to be completed by a deadline.
(c) One which seeks to impose on the Payee Settlement Member any private arrangement which a Payer Settlement Member may have negotiated with a customer.
(4) RESPONSIBILITIES OF A SETTLEMENT MEMBER
(a) Each Settlement Member must comply with CHAPS Rules.
(b) Although a Payee Settlement Member will endeavour to expedite all payments, no responsibility except that specifically stated in CHAPS Rules, will be accepted in respect of transactions in which some further action is dependent upon the time of day for the receipt of funds.
(c) By sending to the Payer Settlement member a LAK (Logical Acknowledgement) for a CHAPS payment the Payee Settlement Member agrees, after authentication verification:-
(i) In the case of payments addressed to one of its own offices, to give same day value to the Payee Customer.
(ii) In the case of payments addressed to another organisation, to give same day value to that organisation.
(7) REPAIR SORTING CODE NUMBER
Each Settlement Member must allocate a unique Sorting Code number to be known as the Repair Sorting Code Number.
(a) Payments received which cannot be applied due to:-
(i) Insufficient or incorrect Bank or beneficiary details
(ii) Authentication failure
(iii) Time stamping by the Payer Settlement Member’s Gateway on normal payments after the close of business (or for any payment after the end of the Settlement Period).
(iv) The agreed constant ‘SETT’ being omitted (by the sending bank) from the after hours field of any payment message received after the first LNP message has been received.
should be returned to the Repair Sorting Code Number of the Payer Settlement Member as soon as practicable but in any case no later than 12.00 noon on the next business day, in which case there will be no interest penalty.
(b) Unapplied payments may also be returned by means other than CHAPS at any time, by mutual agreement, but no later than 12.00 noon on the business day following the original remittance.
(8) WRONGLY DELIVERED AND TRANSMITTED PAYMENTS
(a) Wrongly Delivered Payments
A wrongly delivered payment is one which cannot be applied at the office indicated by the Payee Sorting Code, or is addressed to a non-existent or invalid Sorting Code Number. Such payments must be redirected to the correct destination if within the same Settlement Member.
If by 4.00pm the Payer Settlement Member requests that the payment be returned then the Receiving Settlement Member should return the payment subject to having the full payment details as set out below.
If the Payer Settlement Member does not request the payment be returned until after 4.00pm then the Receiving Settlement Member will use best endeavours to return it that day.
In any event the Receiving Settlement Member will return the payment by 12noon the next day.
(b) Wrongly Transmitted Payments
A wrongly transmitted payment is one which incorporates valid payee details but is made in error (including where the payment has been duplicated) and has been applied to an account in accordance with the details given by the Payer Settlement Member. Nothing in these Rules requires the Receiving Settlement Member to return the payment until the Payer Settlement Member informs them of the problem together will all relevant information as specified below.
If before 4.00pm the Payer Settlement Member requests the payment be returned then the Receiving Settlement Member will return it that day, subject to receiving the correct payment information and gaining the authority of the account holder if appropriate.
In the event that a Receiving Settlement Member which has received a wrongly transmitted payment requires the permission of an account holder to return it, that Receiving Settlement Member shall use all reasonable endeavours to obtain such permission, providing that nothing in these Rules shall be taken to require or permit that Receiving Settlement Member to return that payment in the absence of any such permission from the account holder. The Receiving Settlement Member may, in the course of seeking such permission from the account holder, need to assure the account holder that such a payment has been received even though the account holder may not be able to identify the relevant credit.
(9) AUTHENTICATION FAILURES
The value of payments received by a Payee Settlement Member which do not contain valid Authentication Codes or valid Authentication Sequence Numbers must be returned to the Repair Sorting Code Number of the Payer Settlement Member as soon as practicable, but in any case no later than 12.00 Noon on the next business day in which case there will be no interest penalty.
All authentication failures within CHAPS must be handled according to the “Security Standards Code of Conduct”.
The following points are material.
The Rules are to be “construed in accordance with” the laws and banking practices of England and Wales. That does not indicate that express provisions of the Rules are to be displaced if they are inconsistent with banking practices, but are to be given that meaning within the range of their ordinary and natural meaning which is consistent with banking practices rather than that which is not.
Payer banks remit funds on an irrevocable guaranteed unconditional basis, in sterling and for settlement in real time on the same day as between the accounts of CHAPS members at the Bank of England.
The relationship between “payer bank and payee bank” is a self – contained regime identified in the Rules and is not to be affected by private customer/bank transactions.
By the sending of a LAK after authentication and verification the payee bank agrees with the payer bank to give same day value to the beneficiary.
The return of unapplied payments to the payer is provided for at Rule (7). Four instances are given. The deadline for returns is 12 noon on the next business day. As appears from the context unapplied payments are those which have not yet been credited to the account holder. A similar deadline applies under Rule 8(a) to wrongly delivered payments. These are also by definition unapplied.
The only provision which deals with the return of applied payments is to be found at Rule (8)(b). It is to be observed that this Rule makes special provision for the need to obtain from the payee account holder authority for the return of payment, but it also expressly contemplates that in some cases such consent may be unnecessary. Those cases are not, however, identified. The requirement for the authority of a payee account holder for the return of funds is consistent only with the effect of such return being the discharge of a debt from the bank to the account holder at the time in question and inconsistent with the payee bank holding those funds as agent for the payor bank at the relevant time.
Payments which fail authentication must be returned no later than 12 noon on the next business day.
The deadline for the return of funds to the payer bank is in all cases 12 noon on the next business day.
It is, thus to be observed that these Rules, although they make provision for the return to the payer bank of payments that have not been applied, as well as payments that have been applied, aim to achieve finality of value transfer to the account holder in real time on the same day as the transfer by the payer bank and to achieve finality in the accounting position between the payer and payee banks by 12 noon on the following business day.
It is next relevant to take into account the material provisions of the Criminal Justice Act 1988, as amended in 1993. The material provisions are as follows.
93A – (1) Subject to subsection (3) below, if a person enters into or is otherwise concerned in an arrangement whereby-
the retention or control by or on behalf of another (“A”) of A’s proceeds of criminal conduct is facilitated (whether by concealment, removal from the jurisdiction , transfer to nominees or otherwise); or
A’s proceeds of criminal conduct-
are used to secure that funds are placed at A’s disposal; or
are used for A’s benefit to acquire property by way of investment,
knowing or suspecting that A is a person who is or has been engaged in criminal conduct or has benefited from criminal conduct, he is guilty of an offence.
In this section, references to any person’s proceeds of criminal conduct include a reference to any property which in whole or in part directly or indirectly represented in his hands his proceeds of criminal conduct.
Where a person discloses to a constable a suspicion or belief that any funds or investments are derived from or used in connection with criminal conduct or discloses to a constable any matter on which such a suspicion or belief is based-
the disclosure shall not be treated as a breach of any restriction upon the disclosure of information imposed by statute or otherwise; and
if he does any act in contravention of subsection (1) above and the disclosure relates to the arrangement concerned, he does not commit an offence under this section if-
the disclosure is made before he does the act concerned and the act is done with the consent of the constable; or
the disclosure is made after he does the act, but is made on his initiative and as soon as it is reasonable for him to make it.
In proceedings against a person for an offence under this section, it is a defence to prove-
that he did not know or suspect that the arrangement related to any person’s proceeds of criminal conduct; or
that he did not know or suspect that by the arrangement the retention or control by or on behalf of A of any property was facilitated or, as the case may be, that by the arrangement any property was used, as mentioned in subsection (1) above; or
that-
he intended to disclose to a constable such a suspicion, belief or matter as is mentioned in subsection (3) above in relation to the arrangement; but
there is reasonable excuse for his failure to make disclosure in accordance with subsection (3)(b) above.
In the case of a person who was in employment at the relevant time, subsections (3) and (4) above shall have effect in relation to disclosures, and intended disclosures, to the appropriate person in accordance with the procedure established by his employer for the making of such disclosures as they have effect in relation to disclosures, and intended disclosures, to a constable.
93B – (1) A person is guilty of an offence if, knowing that any property is, or in whole or in part directly or indirectly represents, another person’s proceeds of criminal conduct, he acquires or uses that property or his possession of it.”
A defence similar to that provided for under Section 93A (4) and (5) applies by Section 93B (5) and (6) to an offence under S.93 (B)(1).
Section 93C provides:
“93C – (1) A person is guilty of an offence if he –
(a) conceals or disguises any property which is, or in whole or in part directly or indirectly represents, his proceeds of criminal conduct; or
(b) converts or transfers that property or removes it from the jurisdiction,
for the purpose of avoiding prosecution for an offence to which this Part of this Act applies or the making or enforcement in his case of a confiscation order.
(2) A person is guilty of an offence if, knowing or having reasonable grounds to suspect that any property is, or in whole or in part directly or indirectly represents, another person’s proceeds of criminal conduct, he –
(a) conceals or disguises that property; or
(b) converts or transfers that property or removes it from the jurisdiction,
for the purpose of assisting any person to avoid prosecution for an offence to which this Part of this Act applies or the making or enforcement in his case of a confiscation order.
(3) In subsections (1) and (2) above, the references to concealing or disguising any property include references to concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it.”
Section 93D deals with tipping off in cases where the person concerned knows or suspects that a money laundering investigation by a constable is under way or about to take place.
It is to be observed that the availability of the statutory defences is designed to facilitate the police investigation of the suspected underlying criminal transaction, an objective similarly reflected in section 93D. However, these provisions contain nothing to indicate that the innocent recipient of a transfer of funds who suspects that their origins is an unlawful transaction is under a duty to dispose of the funds by returning them to the transferor. Whereas the offences are not defined to include as an element of the mens rea an omission to report the transfer to the police, omission to do so in the face of the relevant suspicion will deprive the recipient of the funds of a defence to the substantive offence.
The Money Laundering Regulations 1993 provide detailed requirements for giving effect to the Act. These include specific provision for the internal system of regulation of transactions by those who in the course of relevant financial business form a business relationship or carry out a one-off transaction, including the maintenance of internal reporting procedures.
The JMLSG Money Laundering Guidance Notes 1997, while generally explaining the effect of the 1988 Act, contain specific recommendations as to compliance.
“Banks and Building Societies
1.13 All banks and building societies, as providers of a wide range of money transmission and lending services, are vulnerable to being used in the layering and integration stages of money laundering as well as the placement stage. Electronic funds transfer systems increase the vulnerability by enabling the cash deposits to be switched rapidly between accounts in different names and different jurisdictions. Mortgage and other loan accounts are often used as part of this process to create complex layers of transactions.
1.14 Some banks and building societies will additionally be susceptible to the attention of the more sophisticated criminal organisations and their “professional money launderers”. Such organisations, possibly under the disguise of front companies and nominees, will create large scale but false international trading activities in order to move their illicit monies from one country to another. They will create the illusion of international trade using false/inflated invoices to generate apparently legitimate international trade wire transfers, and will use falsified/bogus letters of credit to confuse the trail further. Many of the front companies may even approach their bankers for credit to fund the business activity. Banks and building societies offering international trade services should be on their guard for laundering by these means.
6.2 Where there is a business relationship, a suspicious transaction will often be one which is inconsistent with a customer’s known, legitimate business or personal activities or with the normal business for that type of account. Therefore, the first key to recognition is knowing enough about the customer and the customer’s business to recognise that a transaction, or series of transactions, is unusual.
6.3 Questions that a financial institution might consider when determining whether an established customer’s transaction might be suspicious are:
- is the size of the transaction consistent with the normal activities of the customer?
- is the transaction rational in the context of the customer’s business or personal activities?
- has the pattern of transactions conducted by the customer changed?
- where the transaction is international in nature, does the customer have any obvious reason for conducting business with the other country involved?
Reporting of Suspicious Transactions
6.6 There is a statutory obligation on all staff to report suspicions of money laundering. Regulation 14 contains the provision to report to the “Appropriate Person” (for the purposes of these Guidance Notes called the Money Laundering Reporting Officer (MLRO)) in accordance with internal procedures.
6.7 All financial businesses have a clear obligation to ensure:
- that each relevant employee knows to which person he or she should report suspicions; and
- that there is a clear reporting chain under which those suspicions will be passed without delay to the Reporting Officer.
Once an employee has reported his/her suspicion to the “appropriate person”, s/he has fully satisfied the statutory obligation.
National Reporting Point for Disclosures
6.20 The national reception point for disclosure of suspicions is the Economic Crime Unit of the National Criminal Intelligence Service (NCIS).
6.21 The Economic Crime Unit is staffed by police and customs officers and its postal address is PO Box 8000, London SE11 5EN. The unit can be contacted during office hours on: 020 7238 8607. Outside office hours an answer phone operates on that number. Urgent disclosures can be transmitted by fax on 020 7238 8286.
Termination of a Business Relationship Following a Disclosure
6.27 The NCIS “consent” to undertake the transaction following a disclosure is provided to the reporting institution as a defence against a charge of assisting a money launderer. It is not intended to over-ride normal commercial judgment, and a financial sector business is not committed to continuing the relationship with the customer if such action would place the reporting institution at commercial risk. However, it is recommended that before terminating a relationship in these circumstances, the reporting institution should liaise with NCIS or the investigating officer to ensure that the termination does not “tip-off” the customer or prejudice the investigation in any other way.
It was against this background that the Claimant’s account was opened. In general terms therefore a customer who opens an account at a bank in this country must be taken to accept and be entitled to assume that the bank, if it forms a suspicion covered by the 1988 Act, will act in accordance with that Act and the Guidelines and specifically that it will have in place a money laundering reporting system as indicated in the Guidelines which, in the event of suspicion within the scope of the 1988 Act, it will, if necessary, deploy right up to the point of reporting to NCIS. Equally, if a customer opens an account of a kind which is of a kind into which CHAPS transfers can be made, that customer is entitled to assume that, if a transfer is made for the credit of that account, the bank will operate the account in accordance with the CHAPS Rules, but subject always to such course as may in the circumstances be required for the purpose of compliance with the 1988 Act and the Regulations and Guidelines.
CHAPS transfers have now become such a vital part of daily financial transactions in this country, ranging from the conveyancing of private property to multi-million pound transfers on the money market and in all cases that transfer system is used for the purpose of effecting real time settlement giving same day value. For example, in the year 2001, during the first quarter there was an average daily volume of 89,000 separate payments with an average transaction value of £2.31 million and an average total daily value of £206 billion. Such transactions proceed on the basis that once a transfer has been accepted it is safe for the beneficiary to treat the funds as irrevocably his own. The real time element is crucial. If the seller of a house in a chain of buyers and sellers could not rely on this assumption and had to wait until the bank employees were about to go home at the close of the banking day before he could with confidence rely on the transfer having become irrevocably his, so as to enable him to complete a purchase of another property, it would be necessary for conveyancing to return to the system of physical completion. There would also be massive uncertainties and risks involved in back-to-back money market transactions.
In relation to the operation of the statutory money laundering regime alongside real time transfers it is to be noted that section 93A(3)(b) that the statutory defence by means of reporting to a constable extends to reports to the police made after the carrying out by the person concerned of what would otherwise be an unlawful act of facilitating money laundering provided that the report is made on that person’s initiative and as soon as it is reasonable for him to make it. This flexibility has the dual effect of avoiding the suspecting party being placed in the position in which he interrupts a transaction which course may have the consequence of tipping off the other person concerned and therefore hampering subsequent NCIS investigations.
It is against this background that it can be concluded that the system of CHAPS transfers differs in important respects from other transfer systems and in particular from non-electronic or over-the-counter transfers for value. The CHAPS Rules make specific provision for the return of unapplied transfers and for applied transfers made in error (Rule(8)). The Rules make no other specific provision for the reversal of credit entries following authentication. There must therefore be the very strong implication that following application to the customer’s account, in the absence of error, the banking practice relating to CHAPS transfers is that they are ordinarily irreversible. I use that qualification advisedly because, in my judgment, there is an appropriate analogy with the practice in relation to documentary credits where at the time of presentation of documents, the bank with cogent evidence of fraud can decline to make payment: see United Trading Corporation v. Allied Arab Bank Ltd [1985] 2 Lloyd’s Rep 554.
The same exception is likely to apply in respect of illegal transactions: see Mahonia Ltd v. J P Morgan Chase Bank [2003] 2 Lloyd’s Rep 911.
That said, there is no unavoidable inconsistency between compliance with the requirements of the 1988 Act, as amended in 1993, and the finality of a CHAPS transfer, subject only to the exceptions specified in the Rules. In particular, if a bank has advance warning of a transfer about to be made by CHAPS as to which it already entertains suspicions, it can report the matter to NCIS in advance, or it can withhold authentication while it informs NCIS or, having credited the customers’ account following authentification, it can report the matter to NCIS and wait for directions. If it fears that a transfer out of the customer’s account is imminent it can temporarily freeze the account and inform NCIS, but with due regard to the dangers of tipping off.
The procedural and commercial problems facing a bank which has already received payments and credited them to its customer’s account but, subsequently becomes aware of ongoing money laundering investigations by the police, were explored by the Court of Appeal in Bank of Scotland v. A Ltd [2001] 1 WLR 751. In that case the bank, having been asked by the police not to reveal to its customer information that would tip off in respect of the investigations and being concerned that it was about to be instructed by its customer to pay money out of the account, applied to the court without notice to its customer seeking directions. The judge of his own volition granted an injunction against the bank restraining it from making any payment against the account without the court’s permission. This injunction was discharged by another judge on the application of the customer and the bank was ordered to pay the costs. The transactions turned out to be innocent. The funds were in the meantime released to the customer and by the time the matter came before the Court of Appeal the only outstanding issue was as to who should pay the costs, the Bank or the customer.
The Court of Appeal held that the injunction should never have been granted in the first place but that the bank would have been perfectly justified in applying against the serious Fraud Office and without notice to any other party for an interim declaration under CPR 25.1(1)(b). At page 765, paragraph 40, Lord Woolf said this:
“The bank was, however, in a genuinely difficult situation. There was a dilemma as to what it should do. The mistake it made was not to recognize that there was no point in obtaining relief against A Ltd. It was reasonable to try to anticipate the proceedings which could be expected if it refused to honour instructions of A Ltd as to the moneys which stood to its credit in its accounts. However the appropriate defendant to any application for directions was not A Ltd but the SFO. The question of the information which could properly be disclosed should have been capable of being resolved between the SFO and the bank, but if they could not reach agreement, then the court, would have to resolve the dispute. The hearing could have been held in private and there would have been no question of A Ltd having to be served since it would not have been a party. If it was necessary for any order to be made, in proceedings against the SFO, then the appropriate order would have been an interim declaration under CPR r 25.1(1)(b). The declaration could set out what information it would be proper for the bank to reply on. In determining the terms of any declaration which could be granted, the court would pay most careful attention to the views of the SFO as to what would or would not prejudice the SFO’s investigation. With the assistance of the court, in the great majority of cases there is unlikely to be any difficulty in determining the terms of an interim declaration. The life of the interim declaration would probably be short since in the majority of cases it will only be necessary to conceal the existence of the investigations for a fairly limited period.”
Accordingly, there is available to a bank a procedural course which normally should enable it to proceed consistently with the CHAPS rules at the same time as avoiding criminal liability under the money laundering legislation. As observed by Lord Woolf at paragraph 41, if, following continuing refusal to pay the customer out of the account, the customer commenced proceedings and applied for summary judgment on the debt, the bank, if it was still suspicious of the origin of the funds, could rely on the second ground for withholding summary judgment under CPR 24.2 “and there is no other compelling reason why the case or issue should be disposed of at trial”. Where the circumstances were seriously suspicious “they could very well provide very good reason for the court not being prepared to grant summary judgment,” although to oppose such a judgment the bank would have to draft its evidence with particular care – assisted by any prior advisory declaration made by the court.
Accordingly, giving all due weight to the need to comply with the 1988 Act and to the objective of discouraging money laundering transactions or transactions involving the proceeds of crime, as reflected, for example, in the Basle Committee Report, the argument that in order to protect the interests of the bank, the express regime of the CHAPS Rules can be ignored by the transferee bank by reference to some overriding concept of banking practice designed to achieve disengagement of the bank from a transfer of funds as to which it justifiably entertains suspicions can carry little weight unless there is cogent evidence of a settled banking practice to this effect. On the contrary, that regime can perfectly well accommodate the modus operandi of the money laundering legislation, albeit in some cases with the assistance of the court. In this connection, it is important not to lose sight of the fact that, notwithstanding the bank’s justifiable suspicions, the transaction giving rise to the transfer may be perfectly lawful and the customer may therefore be entitled to expect performance by the bank of its banking contract, the effect of which I consider later in this judgment. If banks are to be entitled to depart from their contracts with customers, on the basis of suspicion of unlawfulness and of general banking practice, that practice has to be clearly proved. That such alleged practice goes well beyond what is necessary to protect the bank from unlawful activity may be a strong indication that no such practice exists.
In his two reports, the bank’s expert, Mr David Trower, had worked for Lloyds Bank and subsequently Lloyds TSB from 1956 to 1997 and had for a substantial period, starting in 1986, been responsible for compliance with legal and regulatory requirements and for prevention of fraud and money laundering. He stated, in substance, that HSBC had in this case got into the position, after transmission of the funds, where it was entitled without delay to retransfer those funds and close the account in order to avoid criminal liability. It was not incumbent on it having frozen the account to refer the matter to NCIS. It was entitled to protect its own interests. At paragraph 18 of his first report he stated:
“…… from a practical banking point of view, a Bank in making its decision to accept or return a credit for its customer’s account would not be conscious of the timing of the LAK. The Bank has received a CHAPS payment and is suspicious about the source of the underlying funds. The Bank would take the same course of action in returning the funds no matter how the funds have been received and it is therefore immaterial that the funds in question were received through CHAPS.”
He further stated:
“…… whilst I do not wish to comment on the substance of the CHAPS Rules, for the reasons set out above I believe that a bank has every right to reject a CHAPS payment should it have grounds to do so, as it would have with any payment received through another channel. Whilst a bank would have to adhere to the criteria of the Banker and Customer Relationship, abide by the CHAPS Rules and meet its obligations under the law, in the case under review the Money Laundering Regulations, first and foremost in the environment pertaining at the time of transaction under dispute the branch would have been conscious of the fraud and money laundering threat and the need to make a decision based on good banking practice and implement any such decision promptly.”
Having observed that HSBC’s Money Laundering Group Policy and Procedures for Electronic Payments In stated “that all payments, which included those received through CHAPS, over £50,000 (or equivalent in currency) would be subject to a separate security check before being credited to the payee’s account by the Bank’s Multi-currency Payments Department,” He later, at paragraph 18, stated:
“ …. from a practical banking point of view, ‘same day value’ means that once a CHAPS payment has been unconditionally credited to a customer’s account, the customer can access the funds instantly. It is for this reason that bankers have to have procedures in place (see paragraph 11.3 above re HSBC’s procedures for CHAPS payments in excess of £50,000) to ensure that funds transferred electronically and that may be considered tainted are identified and the appropriate action taken before they are unconditionally credited to the customer’s account.”
Mr Trower conceded in cross-examination that he personally had never been concerned in the taking of a decision to return an electronic transfer of funds, although in one case he had been concerned with a decision to freeze an account when his bank had been suspicious of their origin.
I am bound to say that, apart from his lack of personal experience of circumstances giving rise to a decision to retransfer funds received electronically on the grounds of suspicion of money laundering or fraud, his assertion that a bank retains an overriding discretion to retransfer funds already credited to an account without the consent of the customer entirely fails, in my judgment, to take into account well-established characteristics of the contractual relationship between the bank and its customer after the bank has accepted the transfer and credited it to the customer’s account. If the implication of any such overriding practice as that to which Mr Trower refers is inconsistent with what would otherwise be the terms of that relationship, very strong evidence of such a practice would be necessary for its implication.
Although much emphasis was placed in argument on behalf of HSBC on the need for the bank, as a matter of banking practice, to protect itself against the risk of criminal liability, reliance was also placed on the need to protect itself against the risk of being liable as constructive trustee if it dealt with the funds suspecting that they emanated from fraud and that suspicion turned out to be correct. In order to test this submission it is necessary to investigate the position of the bank on the assumption that the funds were in truth derived from a transaction of a kind which would give rise to a right of recovery in equity from a recipient of such funds.
The circumstances in which a third party in a position analogous to that of a payee bank can be held liable as a constructive trustee were fully considered in the judgment of Lord Nicholls of Birkenhead, in the Judicial Committee of the Privy Council in Royal Brunei Airlines v. Philip Tan Kok Ming [1995] 2 AC 378. At pages 390-391 Lord Nicholls, speaking of the accessory who is in a position where it is not entirely clear whether a transaction by a trustee is or is not in breach of trust so as to incur liability in equity, observed:
“He is required to act honestly; but what is required of an honest person in these circumstances? An honest person knows there is doubt. What does honesty require him to do?
The only answer to these questions lies in keeping in mind that honesty is an objective standard. The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. Knox J. captured the flavour of this, in a case with a commercial setting, when he referred to a person who is “guilty of commercially unacceptable conduct in the particular context involved:” see Cowan de Groot Properties Ltd v. Eagle Trust Plc [1992] 4 All ER 700, 761. Acting in reckless disregard of others’ rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.
Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.”
In Wolfgang Herbert Heinl v. Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511, there was further discussion by the Court of Appeal of the elements of liability as a constructive trustee as indicated by Lord Nicholls. Having referred to a number of passages, including that already cited, from that judgment, Colman J. observed at page 535 R:
“The observation that “for the most part dishonesty is to be equated with conscious impropriety” must involve that the person alleged to have assisted the breach of trust must be shown to have had, at the time when he provided the assistance, actual knowledge of facts which amount to a breach of trust or which suggest that a breach of trust has been or is to be committed. If the accessory knows facts which fall short of constituting a breach of trust, but which lead him to believe that other facts exist which do amount to an actual breach of trust or will involve a future breach, although he cannot be certain that those facts exist, he will be judged to have been acting dishonestly if he renders assistance when in all the circumstances an honest man, having that knowledge, would not have done so, either at all or without making further enquiry or taking some other steps to satisfy himself that there was no breach of trust.”
The proposition that a bank which in view of its suspicions about a CHAPS transfer which took the course discussed in paragraphs 62-65 above would be running the risk of liability as a constructive trustee presents itself to me as wholly unrealistic. It finds itself subjected to an electronic transfer. It suspects the origin. If withdrawal appears to be imminent, it withholds authentication for the CHAPS transfer. Alternatively, it informs NCIS and discusses what course should be taken if withdrawal is attempted. If necessary and appropriate, it issues an application for an interim declaration against the Serious Fraud Office. In consequence, it declines its customer’s instructions to make payment from the funds received. To characterize the bank’s conduct in such circumstances as amounting to dishonest assistance, such as would found a claim against it as constructive trustee by the true beneficiary of the fund would, in my judgment, be inconsistent with the basis of that relief identified in Royal Brunei Airlines v. Tan, supra, and Heinl v. Jyske Bank, supra. Far from giving dishonest assistance to the perpetrator of a fraud, the bank would be assisting the beneficiary of the fund by obstructing the course of possibly dishonest conduct.
The court of Appeal considered the relevance of a bank’s exposure to the risk of liability as constructive trustee in Bank of Scotland v. A Ltd, supra. Having referred to the test as to such liability applied by Ungoed-Thomas J. in Selangor United Rubber Estates Ltd v. Cradock (No.3) [1968] 1 WLR 1555 at page 1590 and to the judgments in Royal Brunei Airlines v. Tan and Heinl v. Jyske Bank, Lord Woolf observed at page 764:
“Nevertheless we are inclined to the view that it was open to the bank to seek directions on the footing that it was at least a putative fiduciary. If A Ltd had been the recipient of funds which were the proceeds of fraud (something which is not now contended for) and if the bank had such strong grounds for doubting its customer’s honesty that it would itself have been dishonest to turn a blind eye to its doubts, then there was a clear risk of the bank incurring liability in equity as an accessory to breach of trust. A bank placed in that dilemma ought to be able to invoke equity’s assistance. The fact that the bank was not formally constituted as a trustee and that a tracing process would attach not to any assets of the bank but to the chose in action representing the bank’s obligation to its customer, ought not to be an insuperable obstacle. (The terms of Neuberger J’s order, requiring the credit balance to be treated as if it had been paid into court, may provide a technique for surmounting the obstacle, although we would not wish to encourage that sort of technical expedient).
However we do not find it necessary to express a final view on these points, which were not fully explored in argument, since with the development of the court’s powers to grant declaratory relief in appropriate cases it is no longer necessary for the bank to establish the status of a trustee in order to obtain relief.”
and concluded his judgment with these words at page 768:
“The use of the court’s power to grant interim declarations in proceedings involving the SFO will protect a bank from criminal proceedings but it will not automatically provide protection for the bank against actions by customers or third parties. However it seems almost inconceivable that a bank which takes the initiative in seeking the court’s guidance should subsequently be held to have acted dishonestly so as to incur accessory liability. The involvement of the court should however enable, in the great majority of cases, a practical solution to be determined which protects the interests of the public but allows the interests of a bank to be safeguarded.”
What emerges from those authorities is that, although the bank may be placed in a difficult commercial position vis-à-vis its customer by reason of the need to avoid criminal liability including tipping off on the one hand and liability as a constructive trustee on the other, there now exist procedures which it is entitled to deploy in order to protect its position in both respects. These procedures do not necessarily lead to the bank having to disengage from the transfer and they certainly do not normally involve the retransfer to the payor, a course which would be most unlikely to protect the rightful beneficiary of the fund and which might well involve tipping off those criminally responsible.
What then is the legal analysis of the transactions on 21st and 22nd September 2000?
The starting point is to define the relationship between the bank and a pre-existing account holder relevant to external transfers into an account. There is a continuing duty on the bank to credit to the account all such transfers it receives from external sources and which comply with the terms subject to which the account is constituted. Thus, for example, a bank is entitled to decline to accept a transfer of an amount which is less than the minimum permissible for a deposit. Or it might be entitled to refuse to accept a post-dated cheque. Certainly, it could refuse to accept a cheque drawn on an account in relation to which transactions were prohibited by law, as where sanctions were in force against the country in which the drawee bank was located. However, the bank’s entitlement to decline to accept a transfer is not in the nature of an option exercisable according to the bank’s perception of what is commercially desirable but the consequence of the operation of the terms of the account contract with its customer.
It follows that as a matter of analysis the analogy advanced on behalf of HSBC between the acceptance of discharge of a debt by a creditor and the acceptance of an external transfer to a bank so as to create a credit in its customer’s favour is misplaced. The need for conduct amounting to acceptance of a tender of discharge of a one-off debt by a creditor identified in TSB Bank of Scotland v. Welwyn Hatfield DC [1993] 2 Bank LR 267 arises from the fact that the pre-existing contractual relationship between debtor and creditor does not provide for a payment mechanism which entitles the debtor to the discharge of the debt if he complies with its terms. If the contract did include such a provision, and the debtor complied with such terms, the specific acceptance of the tender by the creditor would obviously not be required.
This distinction was indicated in Royal Products Ltd. v. Midland Bank [1981] 2 Lloyd’s Rep.194 in which Webster J. remarked at p198.
“What, then, are the legal implications of those instructions? How are they to be regarded, as a matter of law? In my judgment they are to be regarded simply as an authority and instruction, from customer to its bank, to transfer an amount standing to the credit of that customer with that bank to the credit of its account with another bank that other bank being impliedly authorised by the customer to accept that credit by virtue of the fact that the customer has a current account with it, no consent to the receipt of the credit being expected from or required of that other bank, by virtue of the same fact. It is, in other words, a banking operation, of a kind which is often carried out internally, that is to say, within the same bank or between two branches of the same bank and which, at least from the point of view of the customer, is no different in nature or quality when, as in the present case, it is carried out between two different banks.”
and at page 201
“The substance of Royal Products’ contentions, through Mr. Tugendhat, as I understand them, is that the instructions were not carried out until BICAL had been “paid” and that in law payment is never complete until the payee has consented to the receipt of the payment or is estopped in one way or another from repudiating his consent. It may very well be in the ordinary course that that contention is correct, when one person instructs another to make payment to a third person. But this is not such a case. In the absence of special circumstances which may introduce expressly or by implication special conditions, I cannot see the necessity, either in practice or in law, for the consent of a bank to be obtained before it is to be treated as having received, in one way or another, money or credit which it in turn is to credit to the current account of one of its customers.”
The same distinction is clear from a passage in the judgment of Hobhouse J. in TSB Bank of Scotland v. Welwyn Hatfield, supra, at page 272:
“The physical or ministerial aspect of payment involves the delivery of money by one person to another. Where the two persons meet together face to face and the debtor seeks to hand to the creditor legal tender the physical act of delivery (in the absence of some misrepresentation or mistake) will not be achieved without the concurrence of the debtor [sic] [creditor]. Where the relevant contract or terms of the debt requires payment to be made in a particular way, as for example by payment into an identified branch of a named bank, the payment will be effected by payment into that account. Prior authority has been given to discharge the debt or other obligation in that way: the debtor [sic] has authorised the bank (or other relevant person) to receive and accept the money on his behalf. No further act of concurrence or assent is required from the debtor [sic]. The creditor [sic] discharges his obligation by making the contractual payment in the contractually stipulated manner.”
Consequently, when in the present case the Claimant opened an account which, in accordance with the terms of the account, was available for receiving incoming CHAPS transfers, HSBC engaged that it would accept into his account all CHAPS transfers which complied with the CHAPS Rules and which were otherwise in accordance with the terms of the account.
Did the provisions of the 1988 Act provide the bank with a justifiable reason for declining to accept the transfers? To this the answer is undoubtedly that they did not. That is because under section 93A an offence would not be committed merely by accepting a transfer suspecting that it emanated from fraud or other unlawfulness or that it was part of a money laundering operation, provided that the reporting procedures in subsection (3) were implemented by the bank. An offence based on acceptance of such a transfer would not be proved by the prosecution unless it also proved non-compliance with either of the reporting procedures in (3)(b)(i) or (ii). Accordingly, it would not be open to HSBC to justify non-acceptance of the transfer on the grounds that its mere suspicion rendered acceptance illegal per se.
It follows that once the Claimant’s account had been credited, following authentication and the transmission of the LAK, HSBC became indebted to the Claimant in respect of the transfer. There was nothing that prevented acceptance of the transfer as a credit in accordance with terms of the account contract. Was the effect of the imposition of the marker later that day such as to disengage HSBC from its pre-existing indebtedness?
The marker froze the account in the sense that from 16.14 on that day it ceased to be possible for the Claimant to walk into a branch of HSBC and, as he could have done after 14.03 that afternoon, draw down funds from his account, including the transferred funds. Thus, funds which previously had been available for immediate withdrawal ceased to be so. That remained the position until on the following day at 14.44 they were re-transferred to Barclays.
As already indicated, the bank relies on the decision of the House of Lords in The Chikuma, supra, in support of the proposition that the marker rendered the transfer no longer immediately available and at the disposition of the Claimant, further, that lack of availability continued into the next business day until re-transfer. It is thus submitted in reliance on Momm v. Barclays Bank International, supra, that the bank had until the end of the first banking day to decline to make the transfer available to its customer and this it had done by imposing the marker.
The decision in The Chicuma, supra, was concerned with whether the method of payment of charter hire adopted by the charterers was equivalent to payment in cash on the date for payment. In order to be equivalent to a payment in cash it had to be immediately available to the shipowners in its full amount. The mode of payment involved that although the account of the shipowners at their bank was credited with the full charter hire due on the date when it fell due (22 January 1976), the money would earn no interest until 26th January and, if and to the extent that any of it was drawn down before that date, the shipowners would have to pay back interest on the amount withdrawn. This was held not to be equivalent to a payment in cash on 22nd January which would at once have earned interest and could at once have been drawn down without an interest penalty. The decision thus did not go to the question whether on 22nd January the bank owed a debt to the shipowners. Had, that question been raised, the answer would unquestionably have been that it did. There would certainly have been a debt due, but it would not have been fully payable and would not have been earning interest until 26th January. That case therefore does not assist with the issue in question.
In my judgment, the imposition of the marker did not cancel the debt due to the Claimant. Nor did it reverse the account entries on the bank’s computer. It simply had the effect of postponing for an indefinite period the time when the bank would respond to an instruction from the Claimant for payment out of the account. But the credit balance and the debt remained intact.
Upon that analysis the applicability of Momm becomes irrelevant. The dispute in that case arose out of a transfer of funds into the plaintiff’s bank account on the first day, which was the value date, and, following the announcement that the transferor had ceased trading and was going into liquidation, on the second day the bank’s reversing the entries and withdrawing the credit. The plaintiff customer not having been informed of the credit by the bank, the bank argued that up to the time of reversal of entries the transfer of the credit was only provisional and could be reversed. Kerr J. rejected this argument and held that the deadline for the bank’s decision whether to reverse an entry was the close of banking business on the first day. He concluded by reference to Eyles v. Ellis (1827) 4 Bing. 112, a decision of the Court of Common Pleas, that an account could be held to be effectively credited if the bank’s book entries showed a credit and regardless of whether there was notice of that credit to the customer. At page 799 Kerr J. observed:
“The issue is whether or not a completed payment had been made by the defendants to the plaintiffs on June 26. This is a question of law. If the answer is “Yes,” it is not contested that the plaintiffs have a good cause of action. If there were no authorities on this point, I think that the reaction, both of a lawyer and a banker, would be to answer this question in the affirmative. I think that both would say two things. First, that in such circumstances a payment has been made if the payee’s account is credited with the payment at the close of business on the value date, at any rate if it was credited intentionally and in good faith and not by error or fraud. Secondly, I think that they would say that if a payment requires to be made on a certain day by debiting a payor customer’s account and crediting a payee customer’s account, then the position at the end of that day in fact and in law must be that this has either happened or not happened, but that the position cannot be left in the air. In my view both these propositions are correct in law.”
That case involved an incoming transfer for value on a particular date and the issue was whether the payment had been made on that date. The judgment is authority for the proposition that the question whether the payment had been made on the value date was to be tested by reference to an account entry at the close of business on that date. It is not authority for the proposition that once an account has been credited on the value date with an incoming transfer, the entry can be reversed at any time up to the end of business on that day. This decision does not assist the defendant bank in this case because at the end of the value date there was undoubtedly a credit balance in favour of the Claimant, albeit the account was frozen. If the question had been whether Mr. Eshhati had paid the Claimant on that day, the answer would undoubtedly have been that he had done so.
I would further add that, in as much as Momm is concerned with payments on a given value date, it has no application to payments by CHAPS transfers to a customer’s account. The concept that it is the entries only at the end of the day which evidence whether a transfer has been accepted is misconceived in the context of the CHAPS regime. That regime is designed not only to give same day value but also to make real time transfers of funds. The CHAPS Rules determine the circumstances under which and the time by which funds transferred can be returned to the payer bank, as already explained. Whatever the reason for the return, finality should be achieved by 12 noon on the next business day. The payment via CHAPS having been unconditional, HSBC, having credited the Claimant’s account, were thereafter indebted to the Claimant in the amount of the credit balance. The proposition that by reason of its justifiable suspicions, the bank retained an overriding discretion to reverse the transfer into the account after the 12 noon deadline on the next banking day on the basis of banking practice has not been established on the evidence. Any such practice would not only be fundamentally inconsistent with the bases of the contract with its customer and with the CHAPS rules, as I have demonstrated, but would go well beyond what was reasonably required either for compliance with the Criminal Law or for the reasonable protection of the bank against the risk of liability as a constructive trustee. As I have already indicated, any such practice would therefore have to be the subject of cogent evidence. Such evidence has not been adduced in this case.
Accordingly, I conclude that the transfer by CHAPS of the sum of £944,114.23 to HSBC had by 14.03 on 21st September 2000 created a valid credit on the Claimant’s account and a subsisting debt in that amount due from HSBC to the Claimant. Repayment of that debt having been refused, that is the amount which is now payable with interest to the Claimant.
The Claim based on Breach of Contract
The Claimant advances an alternative case based on breach of an implied term in the banker/customer contract that HSBC would give same day value to the Claimant in respect of any CHAPS payment received for the credit of the Claimant’s account. The term is said to be implied because it represents the reasonable usage of bankers, alternatively of Settlement Members of the CHAPS Clearing Company. The breach of contract is said to consist of failing to repay the moneys in response to oral and subsequent written demands for payment on 16th October 2002.
This alternative case only has to be considered if, contrary to this judgment, the Claimant is wrong in relation to his claim in debt. But that would arise only if HSBC were entitled, as against the Claimant, to refuse to accept a CHAPS payment which it had already applied by way of crediting the Claimant’s account even though there were no error and no illegality involved. However, this hypothesis would clearly be inconsistent with the implication of the term for which the Claimant contends. Investigation of this alternative route to recovery is thus intrinsically unrealistic.
The bank submitted in respect of this damages claim that the Claimant had failed to mitigate his loss by his failure to attempt to recover the price of the data base from EN or from GPTC since Mr. Eshhati had returned the money to that organisation. I have already decided that the Claimant knew from 22nd September 2000 that the money was to be re-transferred to Barclays. There is no evidence of any conduct on his part which was aimed at recovery of the money until he telephoned Mr. Eshhati in July 2002 after the meeting with the bank on 25th of that month. In my judgment, his claim against GPTC would have encountered some difficulty. In particular, GPTC could contend with no little substance that it had already paid the price by the agreed method of transmission of funds to the Claimant’s bank by means of the CHAPS system and accordingly the only basis for such a claim would be for unjust enrichment. Whether that principle would have provided any reasonable basis for a claim against GPTC even if promptly brought is doubtful. On balance, I am not persuaded that failure to mitigate would be a defence to a claim against the Bank. The proximate cause of the damage suffered by the Claimant would have been the Bank’s failure to perform its contract in accordance with its terms by permitting the Claimant to withdraw the price which had been paid by GPTC. The return of the money to Barclays, and Mr. Eshhati’s subsequent repayment to GPTC and the Claimant’s subsequent failure to pursue GPTC for the money are in my view collateral to the material chain of causation of loss. The proposition that the Claimant was acting so unreasonably as to break the chain of causation between the Bank’s conduct and his loss is, in my view, ill-founded.
The Bank further alleges that the Claimant could not recover damages on the ground that there would be unjust enrichment if there were recovery because the Claimant would have the benefit of double recovery – both from HSBC and from GPTC. Reliance is placed on the observations of Pill L.J. in Crantrave Ltd. v. Lloyd’s Bank [2000] QB 917 at page 924:
“There will be circumstances in which a court may intervene to prevent unjust enrichment either by the customer in having his money from the bank as well as having the claim of his creditor met, or by the creditor who has double payment of the debt. The onus is in my judgment on the bank to establish the unjust enrichment on the evidence. In this case not only is there no evidence of authorisation or ratification of the payment to the third party by the customer but there is no evidence of unjust enrichment by the customer. In the absence of authorisation or ratification of the payment, the bank must in my judgment meet this claim and recoup the sum paid, if they can, from the third party to which it was paid.”
Those observations, when read in context, were directed to circumstances where a bank has already discharged its customer’s debt to a third party, but without the authority of its customer, and faces a claim from the customer for re-payment of the sum paid without authorisation. That is a fundamentally different case from one where, as here, the bank has without authority made a repayment to its customer’s debtor, thus leaving the customer with a claim against the bank and a claim against the debtor. In such a case it is open to the customer to elect whether to sue the bank or the debtor. If he chooses to sue the bank, the existence of an alternative claim against the debtor which has not been pursued does not give rise to any question of unjust enrichment.
Accordingly, the Claimant is entitled to judgment in debt in the sum of £944,114.23 with interest from 21st September 2000.