Victims of Ponzi schemes are increasingly seeking to recover their losses from the financial institutions used by Ponzi scheme perpetrators to hold victims' funds before misappropriating them. Whether the theory is that the financial institution had actual knowledge and aided and abetted the scheme or that it was negligent because it failed where harm was reasonably foreseeable to identify and report suspicious Ponzi-like activity, financial institutions can take some steps to minimize the risk of liability for such claims.
Though there is no absolute remedy to claims by Ponzi scheme victims, banks can help prevent such claims. Better understanding the nature of the risk presented is an important first step. The effectiveness of that comprehension can be compounded by implementation of some basic strategies calculated to reduce the potential for such claims. Those include:
- Reviewing the bank's new account information forms to confirm that they elicit sufficient information such that the fiduciary nature of the account is clear (so as to better identify those accounts which may require additional attention);
- Enhancing disclaimer language in the bank's new account information forms requiring fiduciary depositors to acknowledge that the bank has no responsibility to the fiduciary or its beneficiaries to inquire into or otherwise monitor the fiduciary's activities on behalf of the account;
- Considering other mechanisms for the bank to disclaim liability for the actions of fiduciaries, e.g., adding a section on the bank's website explaining what steps a reasonable beneficiary should take to prevent or detect being victimized by a Ponzi scheme architect.
- Augmenting the bank's BSA compliance efforts to include a component directing the BSA officer evaluating suspicious activity to determine whether the accounts in which suspicious activity appears are fiduciary in nature; and
- Renewing efforts to educate bank employees of the need to report concerns about potential impropriety in fiduciary accounts, even if the harm is threatened to parties other than the financial institution.
So long as the financial institutions remain the sole source of financial recovery when the dust of a Ponzi scheme clears, the battle over the scope of bank liability for negligence claims by victims of such schemes will wage on. These steps, however, will improve the bank's at the outset of the battle and perhaps prevent some battles altogether.
Has your bank developed a process to identify potential Ponzi activity in its accounts? Has your bank taken any other steps to prevent claims by Ponzi scheme victims?
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.
