An article in March looked at the duty owed by a bank to obey its customer’s mandate in the context of APP frauds (Philipp v Barclays Bank). In that case, the court noted that a bank has another duty which operates in tension with that primary duty. The outcome is that the bank may be required to refrain from executing an order if and for so long as the circumstances would put an ordinary prudent banker on enquiry that the instruction is an attempt to misappropriate funds.
The court has looked again at this so called Quincecare duty in a case this month involving the Nigerian State and JP Morgan (Federal Republic of Nigeria v JP Morgan Chase Bank NA [2022] EWHC 1447).
The factual background was very involved and concerned the much litigated status of a very valuable oil production licence in the fast changing political environment of Nigeria. There were two payments under scrutiny. The first was made on 23 August 2011. By then, the bank had (a) made no less than 4 suspicious activity reports (SARs) to the Serious Organised Crime Agency (SOCA), with whom they were liaising closely; (b) received at least 7 sets of payment instructions from various Nigerian state authorities; and (c) refused to comply with all but the final payment instructions because in the bank’s view they failed to comply with the terms of an order of the English Commercial Court. The second payment was made on 29 August 2013 following 2 further SARs, further close liaison with the SOCA and multiple further payment instructions.
Mrs Justice Cockerill carefully reviewed the authorities on the Quincecare duty, including the Court of Appeal decision in Philipp (which was handed down during the trial). As you would expect, Nigeria was arguing that the Quincecare duty was not solely on negative duty (a duty to refrain from paying out whilst on enquiry), but a positive duty to make enquiries or even apply to the court for directions.
The bank of course contended for a narrower duty. Given the terms of the Court of Appeal decision in Philipp, the bank had to change its opening position when closing the case, but only conceded that Philipp was authority for the proposition that it is in theory possible for the duty to apply to cases of APP fraud as well as the classic situation of instructions issued by a dishonest agent.
The bank also submitted that the common law Quincecare duty had to be seen in the context of the bank’s statutory duties regarding money-laundering and suspicious payments. Its statutory duty to file a SAR did not mean that it was “on inquiry” for Quincecare purposes.
The bank argued that the duty was primarily negative and that while the bank had to resolve the tension between its duties, it did not follow that the duty required the bank to take positive steps.
Mrs Justice Cockerill found the answer to the competing submissions by focussing on a narrow question: whether the bank was on notice that the payment instruction was an attempt to misappropriate the customer’s funds. That is entirely consistent with the authorities.
The choice a bank faces is whether to comply with its customer’s payment instruction or not. The only reason not to comply is if the bank is on enquiry that the instruction is an attempt to misappropriate funds. The bank cannot bury its head in the sand. It is judged by the standard of an ordinary prudent banker. The more interesting question is what will put an ordinary prudent banker on inquiry of a fraud? Surely the fact that its KYC duties arise as a matter of statute does not mean that the ordinary prudent banker can ignore the outcome of those investigations?