Giambrone & Partners fully understands the devastating effect caused by losing funds to fraudsters. Our banking and fraud litigation department have developed various strategies to assist in recovering money lost to fraud for our clients. Our highly experienced lawyers leverage all approaches and other factors to assist in the recovery. Organisations that inadvertently facilitate fraud can also be called to account, recognising that failing to undertake thorough due diligence and on some occasions, not complying with their own procedures that are intended to protect their clients, carry consequences.
Giambrone & Partners client-centric approach focuses on the culpability of all individuals and organisations that were party to the fraud, whether advertently or inadvertently.
Demetri Bezaintes, an associate, commented "financial fraud frequently involves sophisticated financially savvy players who also
deceive the professionals that have a responsibility to protect their clients from fraud. However, that does not absolve professional organisations from responsibility if they do not carry out adequate due diligence on a transaction." Demetri further commented "there are actions that can be taken to ensure that such professionals are accountable and financial compensation to the victim may be a consequence."
Banks and Freezing Orders: Their Duties, Liabilities, and the Risk of Contempt
A freezing order, (previously known as a Mareva injunction) as the name suggests, freezes the assets of the party it is directed at. Freezing orders are issued to prevent the fraudsters from emptying their bank accounts and removing the stolen funds to beyond the reach of the law. It is not only the fraudster that must comply, all third parties, particularly banks, are also bound by its restrictions. For example, if a bank permits money to be withdrawn from an account subject to a freezing order there are potentially serious consequences. This can include being held in contempt of court. In the brave new digital world of Crypto exchanges, they also fall within the remit of a freezing order and must comply with the order.
The effects of a Freezing Order on a Financial Organisation
A freezing order is aimed at preventing a defendant from moving or dissipating the assets during the course of a court action before judgment is enforced. When banks and other financial institutions receive notice of such an order they must immediately comply by taking the following actions:
- Actively prevent all withdrawals from the defendant's account that would reduce the available funds.
- Immediately cease to process cheques, standing orders, direct debits, or bank transfers that may bypass the order.
- Prevent the defendant from accessing overdraft facilities unless this is expressly permitted.
Payments from third parties can still be made into the defendant's bank account, if the court order does not definitely exclude this.
Consequences of Failure to Comply with a Freezing Order
If a bank or financial institution fails to comply with a freezing order and knowingly permits a defendant to withdraw or move funds within the account, this is a serious offence and carries with it the risk of being held in contempt of court. Such an offence can result in the following consequences
- Substantial financial penalties in the shape of fines.
- If there are substantial financial losses suffered by the fraudster's victim as a consequence of the bank's failure to comply with the freezing order, the complainant may sue for damages.
- The individuals at the bank who were responsible for breaching the freezing order, can, be personally be held to account and in extreme cases could face prison.
There are no circumstances where the bank or the executives can plead ignorance. Once the freezing order has been received they are obliged to prevent unauthorised withdrawals.
For example, in the event of a high profile fraud case where the court has issued a freezing order. However, the bank negligently permits a substantial sum of money to be transferred out of the account by wire transfer to an off-shore entity. When the claimant learns of the breach, the bank can be brought before the court and if found to have failed in its duty to protect the funds in the claimant's account, a heavy fine can be imposed and the bank can be ordered to pay the claimant compensation. Such action is frequently taken against negligent financial organisations.
Cryptocurrency Exchanges
Whilst cryptocurrency generally is not subject to the same level of regulations and restrictions imposed on other financial organisations, the effects of a freezing order brought to protect a complainant's financial assets the exchange must:
- Prevent withdrawals and the transfer of any assets that violate the order
- Ensure that the assets that have been frozen are intact until such time as the court issues further directions
- Block indirect withdrawals such as conversion into different cryptocurrencies.
The Challenges Crypto Exchanges Face
Banks and other financial organisations have had decades if not centuries of rules and regulations, including being obliged to adhere to court orders relating to protecting their customers. Cryptocurrencies are a relatively recent innovation and are lightly regulated. Financial globalisation has increasingly meant that freezing orders are required to be enforced across borders especially against centralized exchanges that interact with traditional financial institutions.
Offshore crypto exchanges have attempted to claim that they are not bound by a freezing order issued in a specific jurisdiction. However, the courts are increasingly enforcing orders across borders. A crypto exchange that permits the freezing order to be circumvented by the user could face the same consequences as a bank and face contempt of court proceedings with all the potential consequences.
Recently a case involving a claimant who obtained a proprietary freezing order related to stolen Bitcoin held on a centralised exchange based in a foreign jurisdiction that refused to comply with the order, was forced to comply with the order, thereby setting a precedent in holding crypto exchanges accountable, as are banks and financial organisations.
Conclusion
Banks and cryptocurrency exchanges are certainly not above the law when it comes to freezing orders. If either permit unauthorized withdrawals, they can be held in contempt, fined and ordered to compensate claimants. Giambrone & Partners highly competent financial fraud litigation lawyers have a wealth of experience in recovering funds lost to fraud and leveraging legal remedies to hold financial institutions of all types who disregard their obligations to account and recover lost assets.
Demetri Bezaintes is an associate based in the London office within the Financial Services and Crypto Litigation Department. He is an SRA-regulated Registered Foreign Lawyer (RFL) in England & Wales and a qualified Greek Lawyer (dikigoros).
Demetri has a thorough knowledge of investment fraud and fund tracing. He works tenaciously for our clients, advising on cryptocurrency, Forex trading disputes and regulatory investigations. He draws his expertise in investment law from his experience in the banking sector and his experience in banking and financial services regulation. Prior to joining Giambrone & Partners Demetri worked at an international bank, where his main focus was the enforcement of freezing orders and third-party debt orders.
He approaches cross-border jurisdiction matters with a comprehensive view, based on his knowledge of both civil and common law. After qualifying as a lawyer in Greece, he obtained a Graduate Diploma in Law from the University of Westminster.
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.
