By Tochukwu Onyiuke
The last few years in the global financial world have seen a sharp increase in financial fraud including money laundering.
Financial crime is growing and not reducing.
This is despite the well-intentioned focus by regulators and financial institutions alike.
According to David Grace, Global Financial Crime Leader for PWC, “The burden on regulated institutions is growing and the need to improve the effectiveness and cost efficiency of prevention and detection systems within them continues to be a major effort”.
The speed at which financial crimes occur is always needed by fraudsters for the purposes of taking absolute control of the proceeds of crime within a short time. This makes it cumbersome for financial institutions to prevent further damage or even track the proceeds of fraud.
More often than not, the proceeds of financial crime get dissipated within a few hours, a few days or a week. If this happens, the process of obtaining freezing orders from the court over proceeds of a financial crime may be an unyielding long route.To this end, the proceeds of financial crime may have been dissipated before freezing orders are obtained to preserve the proceeds of fraud.
Mareva Injunctions/freezing orders are commonly sought by legal practitioners through court orders for the purposes of freezing a debtor’s assets to prevent them from being taken away or for the purposes of preserving proceeds of financial crime from being dissipated.
The ultimate goal in seeking mareva injunctions or freezing orders is to prevent a defendant whether innocent or guilty to an action from dissipating their assets from beyond jurisdiction of a court so as to frustrate a potential judgement.
A letter sent by a private party that provides a financial institution with sufficient particulars and evidence of fraud, and outlines its legal obligations in the circumstances, can both entice the institution to take the necessary steps to thwart the fraudulent activity as well as afford comfort that any action it takes to enforce the letter’s request were made reasonably and in good faith.
By placing a bank on notice and therefore opening the bank up to various public and private law duties to prevent any further misappropriation of funds, a ‘Mareva by Letter’ can therefore serve as an effective asset preservation tool for victims of fraud.
The development of the extra-judicial tool commonly referred to in the trade as ‘Mareva by Letter’ (referred to by the Courts of England & Wales as a ‘Freezing Order by letter’) illustrates how much the current global banking climate has changed globally in the past few years.
A spate of case law and regulations that advocates better corporate governance and cross border cooperation in the fight against economic crime in particularly money laundering, has resulted in the slow but steady undermining of the stoic and uncritical acceptance of client confidentiality.
The long-aged position of the law is that a bank owes a duty of care to its customers at all times to the exclusion of third parties, thus letters written by third parties to banks, even those evidencing all possible indicators of fraud, were generally disregarded by banks in the past. Banks generally saw their duty to their customers as paramount; and this approach could have more often than not been taken with the bank suffering little to no adverse effects.
However, recent decisions in Ontario such as Semac Industries Ltd. vs. 1131426 Ontario Ltd, and the 2010 Ontario Superior Court of Justice decision in Dynasty Furniture vs. Manufacturing Ltd, vs. Toronto Dominion Bank (“Dynasty”) have made clear that a bank that knows of a customer’s fraud in the use of its facilities, or has reasonable grounds for believing or is put on its inquiry and fails to make reasonable inquiries, will be liable to those suffering a loss from the fraud. By this decision, it appears that a third party can by a letter inform a bank that the proceeds in its Customer’s account are gains from unlawful financial activities. Once the bank has knowledge of this, it will be liable if reasonable steps are not taken to freeze or protect the funds from being dissipated.
In England, while there is as of yet no general duty of care owed by banks to non-customers, the law does recognize third party liability on the basis of constructive trust theories, as established in the often cited House of Lords case of Barnes vs Addy, through which banks may be liable in instances where there is knowing assistance or knowing receipt with respect to fraudulently obtained funds.
Similarly, in the United States and Switzerland, bank civil liability to non-customers can be established where there is evidence of the bank’s negligence, recklessness, or aiding and abetting of fraud. As a result, a letter that advises a bank of fraud or suspicious activity can serve as the basis upon which to establish that a bank had actual knowledge of the fraud or, alternatively, could be deemed a ‘red flag’ sufficient to place the bank on constructive notice of a problem.
By ignoring such a letter, a financial institution would run the risk that liability will be imposed for all activity subsequent to notice being acquired.
Accordingly, while the different jurisdictions have varying requirements for the establishment of bank liability to third parties, actual knowledge of a fraud will necessitate a bank in all circumstances to take certain positive actions, and an intentional disregard of these responsibilities will likely give rise to a cause of action by a third party victim.
The existence of these obligations therefore provides increasing legitimacy and potency to letters that put a bank on notice of its customer’s potential or actual fraud. Its practicality should therefore persuade victims of fraud to turn to such letters as an additional means of combating the potentially devastating effects of fraud. As well, banks should be aware of their potential liability and be prepared to weigh the risks of ignoring a letter that outlines a case for fraud and react to such letters appropriately.
As the global financial market continues to expand with high technology targeted at making banking easy, the entire system becomes susceptible to fraudulent activities that could see illegal funds disappear in a few hours. This new legal tool becomes an effective tool in the fight against international money laundering and illegal financial transactions. As this tool continues to guard the banking industries in the western world, Nigeria is yet to see this effective tool being used in its original name and form “mareva by letter”. The practice of third and private parties writing to the bank to restrain its customers from accessing funds in their accounts is alien to our jurisprudence.
However, the Security Agents in Nigeria have over the years written to banks to place the accounts of parties under investigation on hold.
The EFCC Act (Economic and Financial Crime Commission), empowers the Commission to issue a directive to any bank to freeze the account of any of its customers under investigation.
The directive must however be made only after the Commission has obtained an order of Court to that effect.
The law provides that this order can be obtained without informing the party affected and this is usually the case.
The practice has on very many occasions been subjected to systemic abuse by law enforcement agencies. The systematic abuse has resulted in many law suits against banks who had complied with just mere directive by the Commission to place an individual’s account on caution without a court order. Rather than obtain a court order to place a caution on an account as provided by the law, the EFCC routinely issues directives to banks without waiting to undergo the inconvenience of obtaining a court order.
This practice by the Commission may be in line with international best practices in the use of Mareva by Letter to restrain an operator of an account from accessing funds therein when it appears that the proceeds in the account are as a result of fraud. There might seem to be a similarity between the concept of Mareva by letter and the practice by EFCC writing to the banks to place an account on hold. At the end, the ultimate goal is always to preserve proceeds of funds from further dissipation, without a court order, when the route to the court system may take a longer time.
However, the hope to informally safeguard proceeds of fraud without a court order was dashed when the Court of Appeal, Lagos Judicial Division in the case of Guaranty Trust Bank Plc vs. Mr. Akinsiku Adedamola (Unreported) in Appeal No, CA/L/1285/2015 per Hon. Justice Tijani Abubakar held that the EFCC cannot on its own direct the bank to place a restriction on accounts without a court order. By this decision, it does appear that Mareva by letter may never find its way into our jurisprudence.
It is the position of the writer that as the Nigerian banking system relies on top notch technology for business, effective ways to safeguard banks and individuals in the case of fraud ought to be developed in line with international best practices.
We must embrace the extra-judicial tool used in preservation of proceeds of fraud pending court orders.
Though Nigeria is bedeviled with systematic abuse in every aspect of its human endeavors, the decision in Guaranty Trust Bank Plc vs. Mr. Akinsiku Adedamola may seem to be the best given the circumstances surrounding the facts of the case.
A proper review of some of the Nigerian laws and statutes cannot in our opinion support the decision of the Court of Appeal in Guaranty Trust Bank’s case. For example, Section 6 of the Money Laundering (Prohibition) Act, 2011 grants the Economic and Financial Crime Commission powers to place a “stop order” not exceeding 72 hours on any account or transaction if it is discovered in the course of their duties that such account or transaction is suspected to be involved in any crime.
It is opined that the extra-judicial tools are recognized in our jurisprudence as some statutes have codified provisions and procedures empowering certain agencies of government to exercise such powers within the confines of the law. But this recognition may not be in the form and practice of Mareva by letter where private individuals or legal practitioners can engage in requesting banks to place accounts on hold on suspicion of fraud.
With the decision of the Court of Appeal in Guaranty Trust Bank Plc vs. Mr. Akinsiku Adedamola, the powers of the Commission to place accounts on hold have been taken away despite the fact that the use of extra-judicial tools for placing restrictions on customers account has gained universal eminence and necessity due to the continuous rise of financial crime in the world at large.
. Tochukwu Onyiuke, a Partner in Accendolaw Barristers & Solicitors writes from Lagos.
