Recent Canadian judicial decisions have established that a bank
owes a duty of care to non-customers once it has actual knowledge
of, or is willfully blind to, the use of its services for
fraudulent purposes. In Ontario in particular, the possibility is
still open that a bank may owe such a duty even where it does not
have actual knowledge (or is not willfully blind or reckless to the
existence) of a fraud.
A similar recognition of a duty financial institutions have to
third party victims when it is put on notice of fraud can be seen
in decisions emanating from American, English, and Swiss courts.
The emergence of this duty increases the viability of the
extra-judicial mechanism commonly referred to as a Mareva by
Letter. A letter sent by a private party that provides a financial
institution with sufficient particulars and evidence offraud, and
that outlines its legal obligations in the circumstances, can both
entice the institution to take the necessary steps to thwart the
fraudulent activity as well as afford ~ comfort that any actions it
takes to enforce the letter's request were made reasonably and
good faith. By placing a bank on notice and therefore opening the
bank up to various public and private law duties to prevent any
further misappropriation of funds, a Mareva by Letter' can
therefore serve as an effective asset preservation tool for victims
Letters of this nature, even those evidencing all possible
indicators of fraud, were generally disregarded by banks in the
past. Banks generally saw their duty to their customers as
paramount - and this approach could have more often than not been
taken with the bank suffering little to no adverse effects.
However, recent decisions in Ontario such as Semac Industries Ltd.
v. 1131426 Ontario Ltd, and the 2010 Ontario Superior Court of
Justice decision in Dynasty Furniture v. Manufacturing Ltd, v.
Toronto Dominion Bank ("Dynasty") have made clear that a
bank that knows of a customer's fraud in the use of its
facilities, or has reasonable grounds for believing or is put on
its inquiry and fails to make reasonable inquiries, will be liable
to those suffering a loss from the fraud.
Justice Wilton-Siegel in Dynasty found that in these
circumstances the bank would have "actual knowledge" of
the fraud, which is sufficient to give rise to liability. On
appeal, the Ontario Court of Appeal agreed with the lower court
decision, but also left open the issue of whether a bank can be
held liable to third party victims in situations where the bank
only had "constructive knowledge" of the fraud.
In England, while there is as of yet no general duty of care
owed by banks to noncustomers, the law does recognise third party
liability on the basis of constructive trust 'theories, as
established in the oft cited House of Lords case of Barnes v Addy,
through which banks may be liable in instances where there is
knowing assistance or knowing receipt with respect to fraudulently
obtained funds. Similarty, in the United States and Switzerland,
bank civil liability to noncustomers can be established where there
is evidence of the bank's negligence, recklessness, or aiding
and abetting of fraud. As a result, a letter that advises a bank of
fraud or suspicious activity can serve as the basis upon which to
establish that a bank had actual knowledge of the fraud or,
alternatively, could be deemed a 'red flag' sufficient to
place the bank on constructive notice of a problem, By ignoring
such a letter, a fina~cial instttution would run the risk that
liability will be imposed for all activity subsequent to notice
Accordingly, while the different jurisdictions have varying
requirements for the establishment of bank liability to third
parties, actual knowledge of a fraud will necessitate a bank in all
circumstances to take certain positive actions, and an intentional
disregard of these responsibilities will likely give rise to a
cause of action by a third party victim. The existence of these
obligations therefore provides increasing legitimacy and potency to
letters that put a bank on notice of its customer's potential
or actual fraud. Its practicality should therefore persuade victims
of fraud to turn to such letters as an additional means of
combating the potentially devastating effects of fraud. As well,
banks should be aware of their potential liability and be prepared
to weigh the risks of ignoring a letter that outlines a case for
fraud and react to such letters appropriately.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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