A banker receiving an unexpectedly large deposit into an account has to juggle the risks of a number of threats: avoiding liability in money laundering, tipping-off offences, and not least the threat posed by the civil law concept of constructive trust. A constructive trust claim could cost the bank a substantial amount of money and, unlike the system for criminal fines under POCA, there is no tariff to cap the amount. Duncan Aldred, a partner in the Banking Litigation team has written a full and detailed article on the issues facing a bank holding money on constructive trust.

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Full Article

You are a banker. A heavy deposit comes in. You are happy about this, but alarm bells ring because you know about the risks around money laundering. Maybe, on this occasion, the deposit arrives into the account of an established customer, so there is no need for a Know Your Customer check to be carried out. But if you are suspicious that the money might represent proceeds of crime, there is an obligation to make a Suspicious Activity Report ("SAR") to the Serious Organised Crime Agency ("SOCA"). You then have to obtain SOCA's consent to dealing with the funds, or wait for time to expire without hearing an objection before you can be safe in paying the money away. And there's tipping off to remember, too. Under section 333A Proceeds of Crime Act ("POCA") there is personal criminal liability if you make a disclosure that is likely to prejudice any investigation that might be conducted following your report.

Whether one of the deadlines on the SAR scheme expires without SOCA getting in touch, providing you with comfort by default, or SOCA positively responds with its consent for an intended transaction, can you really afford to breathe a sigh of relief? In many cases, the answer will be a clear No.

The SOCA – related dangers are all set out in POCA, and, as a banker, you certainly need to have the provisions of that statute clearly in mind, for the personal criminal liability of you and your colleagues and for your Bank's reputation with its regulators. But, while you keep your eye on that threat, you also need to keep very clearly in mind the threat posed by the civil law concept of constructive trust. A constructive trust claim won't cost you your liberty, but it could cost the Bank a substantial amount of money and, unlike the system for criminal fines under POCA, there is no tariff to cap the amount.

What is a constructive trust, and what can you do to fend off this hidden threat?

There must be people out there who are excited by the mechanics of trust law. For most of us, though, this area seems rooted firmly in the era of Dickens and brings to mind verbose and dusty deeds executed with wax seals under elaborate Victorian signatures. Constructive trusts are different. They are imposed upon a relationship by the court, after the event. Where, for example, a fraudster takes money from a victim, the court will regard the fraudster as "constructive trustee" of the fund, and the victim as his "beneficiary".

The starting point is that there can only be a "trust" argument where there has been a fund on which a trust or proprietary claim could have bitten. The recent case of Moriarty & Another v Atkinson & Others ([2009] All ER (D) 154 (Court of Appeal Judgment 16 December 2008)) confirmed this basic point. In other words, to be vulnerable, the bank would have to have received a fund of money that the "beneficiary" could have laid claim to on day one, if the beneficiary had known where to find it.

The two mistakes the bank can make

Take your practical situation, as a banker in receipt of a deposit. You have ticked all the POCA boxes, but how can a constructive trust still catch you out? There are two ways this can happen. Either (a) the bank receives "trust" money for itself or (b) the bank assists someone else to take "trust" money. Particular care is needed to avoid falling into the constructive trust trap, because the "trust" label might only be applied to the fund many years after the event (a 12 year limitation deadline normally applies in these cases).

The Bank receives "trust" money for itself

For the bank to get things wrong in this way, it has to (1) receive funds for its own benefit and (2) have notice that the money is trust property and that the transfer is in breach of trust.

Even if we take it that your responsible bank will not be setting out to plunder trust monies for its own benefit, it will still cross the line if, for example, it sets off between customer accounts, taking "trust" funds from one account to pay off an overdrawn balance on another (Agip (Africa) v Jackson [1990] Ch 265; Box v Barclays Bank plc [1998] Lloyd's Rep 185).

Equally, receiving payment of bank charges out of "trust" monies will count as receiving funds for the bank's own benefit. Where the bank receives "trust" monies for its own benefit, it does not have to be dishonest in order to be breaching the trust. The court applies a different test: was the recipient's state of mind such as to make it unconscionable for it to retain the benefit of the receipt? (Bank of Credit and Commerce International (Overseas) Ltd v Akindale [2001] Ch 437; [2000] 3 WLR 1423; [2000] 4 All ER 221).

Importantly, the Bank does not need to know the identity of the person or persons who might claim to be beneficially entitled to the funds or to know all the details upon which the "trust" claim might be based.

The Bank assists someone else to take "trust" money

The much more common mistake for the Bank to make is to receive nothing for itself but to assist a breach of trust by another party whilst having what the court has described as "dishonest" knowledge. If the bank is aware that there is a serious question mark over the provenance of funds in a customer's account and it pays the monies away from that account on the customer's instruction, it risks a claim from the true beneficial owner of the monies that the bank wrongly paid the monies away and must make good the difference.

The court has wrestled with various definitions for the kind of knowledge the bank must possess in order to be fixed with this liability. Even after a number of refinements, the current test still, but perhaps inevitably, lacks precision: taking into account what the bank actually knew, were its actions dishonest according to normally acceptable standards of honest conduct? (Twinsectra Ltd v Yardley [2002] UK HL12; [2002] 2 AC 164)

No easy way out

In a recent case that did not reach the court, a bank confronted its customer who, in effect, confirmed that monies in its account were the fruits of an enterprise that had attracted a prison sentence for dishonesty. The customer in that case urged to the bank to pay the balance away quickly, and before any "beneficiary" came to know where the money was being held. The logic behind this request was that, even if the bank had "dishonest" knowledge, the "beneficiaries" would be powerless to take any action if, by the time they made their claim, there was no longer a fund of trust monies for them to grab.

There was, of course, no way that the bank could safely fall in with this request. Once the bank (a) held 'trust' monies and (b) had dishonest knowledge, it would have paid the monies out at its own risk: the pain of a constructive trust claim comes when the 'trust' fund has gone and the bank, in effect, has to replace it from its own resources.

The unavoidable paper trail

Finally, back to the criminal regime, and to the danger of scrupulously ticking those POCA boxes and failing to take in the wider picture. Imagine a case where your bank suspects it might have received criminal property into a customer's account, makes it report to SOCA, takes care not to pay the monies away without SOCA's blessing or to "tip off" the customer that it might be subject to an investigation.

Waiting around the corner is the "beneficiary" of the constructive trust who not only calls for your bank to compensate him for his lost funds, but who wins his victory by turning the bank's POCA compliant behaviour against it.

Those internal bank emails expressing concern about the possible source of funds and even the Suspicious Activity Report will be discloseable in a dispute, maybe even before the "beneficiary" has formally launched litigation against the bank. The fact that you reported to SOCA might have got you off POCA's criminal hook, but it will provide very clear evidence for a civil claim that the bank had "dishonest" knowledge at a specific time and will go a long way towards making out the beneficiary's case.

Think Big Picture

The rules of the game are simple:

  • There's more to be afraid of than the POCA regime: be aware of the risk of a constructive trust claim.
  • Where you have concerns about the provenance of funds that you receive, even if the POCA boxes have all been ticked, think carefully before you take those funds for your own benefit or pay them away.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 23/03/2009.