Should financial institutions be reimbursed for the costs incurred by assisting victims of fraud?

It is common for a claimant to seek an injunction as part of a legal strategy to recover their property. The two sought most frequently are a Norwich Pharmacal Order ("NPO") and a Freezing Order ("FO"). A NPO requires the respondent to provide information which will assist the applicant in pursuing their claim – normally by identifying the wrongdoer and/or disclosing information necessary to bring a claim. Generally a NPO is available against a party which has become involved in the alleged wrongdoing (innocently or not) but is unlikely to be a defendant at trial. A FO restrains a party from disposing of or dealing with assets and can be obtained against a defendant or a third party to prevent assets being dissipated to frustrate enforcement of a judgment.

These injunctions evolved as creatures of English law and have subsequently been adopted in legal systems across the world, including Jersey. A feature of both is the likely involvement of a financial institution, either because it holds the information sought under a NPO (for example the details of a bank account to which misappropriated assets have been transferred) or because its cooperation is required to ensure that a FO is effective.

As no wrongdoing was being alleged against them, it became an accepted requirement that applicants should undertake to meet the third party's reasonable costs of complying with the orders sought. The template freezing orders contained in CPR PD25A and Royal Court Practice Direction 15/04 both contain provisions to this effect.

At first it seems logical that a party who is not accused of wrongdoing should receive their reasonable costs of assistance. However the requirement for an undertaking leaves applicants with no option but to assume a substantial financial burden as the price of obtaining crucial injunctive relief. The conduct of parties that facilitate the fraud may not give rise to liability, but in some cases fairness would demand that they meet their own costs of helping a victim to seek redress.

The brief (hypothetical) case study below illustrates such a situation.

Mr B was 85 years old and lived alone in the UK. Due to medical problems he had a full time carer, Mr F. Mr B went into hospital for surgery from which he failed to recover and died two months later. Mr B had one daughter, Miss R, who became responsible for his estate.

Miss R vaguely recalled that Mr B had an endowment policy. Miss R contacted the provider and was informed that Mr B had indeed had a policy but it had been transferred. Miss R had never liked Mr F and suspected foul play. She was told by the provider that it could not verify her suspicions of fraud and she could not have any details without a court order. Miss R therefore had to instruct lawyers to apply for a NPO against the provider and undertake to meet their reasonable costs of compliance.

The Court granted the NPO and Miss R learned that after Mr B died Mr F had used forged documents, which he backdated to a time before Mr B went into hospital, to transfer the endowment policy into his name. He then encashed the policy and transferred the proceeds to an account in the BVI. The provider never attempted to contact Mr B about these transactions. 

To secure the funds Miss R had to instruct more lawyers to obtain a FO in the BVI. Again she had to undertake to meet the reasonable costs of compliance. Miss R eventually obtained judgment against Mr F but there were insufficient funds in the BVI account to pay it in full.  Therefore Miss R was left unable to recover all her own costs and was also obliged to pay those of the endowment provider and the BVI bank.

Financial institutions are required to maintain effective procedures to counter risks such as fraud, bribery, money laundering and the financing of terrorism. In allowing Mr F to transfer the policy and shelter the proceeds, both the endowment provider and the bank failed to prevent the abuse of their services to the detriment of Mr B's estate. In these circumstances, is it fair that Miss R should pay their costs?

The current law is broad enough to permit a party like Miss R to apply to vary the costs provision if she feels unfairly prejudiced by it. Unfortunately, the grounds for such an application will only be revealed once the disclosure has been received, and the application itself would expose Miss R to further costs, when she is already out of pocket. Similarly if the disclosure reveals actionable wrongdoing by a financial institution, Miss R could bring a claim against it. While this may be true as a matter of law, the costs risk to an individual claimant who sues a financial institution – with deep pockets to engage in a legal war of attrition – places such a course beyond all but the super-rich.

The circumstances in which a party might seek a NPO or FO are virtually infinite and the law must be sufficiently flexible to meet the interests of justice. There will be instances where it is legitimate for a financial institution, or any respondent, to receive its costs of compliance from the applicant. The question is one of balance. It may be that the law has developed so as to tip the scales against victims of fraud. This imbalance could be redressed by reframing the standard costs undertaking to provide that respondents shall bear their own costs of compliance but be able to apply at the conclusion of the case (or their involvement therein) for an order that the applicant pay their reasonable costs, based on the balance of fairness. This would reduce the burden on victims and still provide a mechanism for blameless third parties to be reimbursed in appropriate circumstances.

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.