UK: Constructive Trusts: The Lurking Danger

Last Updated: 25 March 2009
Article by Duncan Aldred

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.

To view the article in full, please see below:

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

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.