Fraudulent Payments: The English Court Provides Much Needed Clarity and Comfort For Financial Institutions Processing Payments

The English court has recently provided some much needed clarity on when banks and other financial institutions may be put on inquiry that a payment instruction is an attempt to misappropriate the payor's funds, and so should not be executed.¹ This is known as the 'Quincecare duty'.

The Quincecare duty is controversial and has been subject to academic criticism over the years as it conflicts with the banker's primary duty to comply promptly with authorised payment instructions from its customer. Although the scope of the duty has now been narrowed by the English court in a welcome move for financial institutions which process client payments, such institutions would be well advised to ensure compliance with the duty to avoid any liability for having assisted in the facilitation of a fraudulent transaction.

Facts

In 2011 and 2013 the Defendant, JP Morgan Chase Bank, N.A. ("JPMC"), made payments totalling just under US$1 billion to accounts at another financial institution held by a Nigerian company called Malabu Oil and Gas Ltd. The payments were made from a depository account opened at JPMC by the Claimant, the Federal Republic of Nigerian (the "FRN"), and on instructions from authorised representatives of the FRN. Subsequently, the FRN alleged that the payments formed part of a fraudulent scheme against the FRN and that JPMC was in breach of its Quincecare duty by virtue of having made those payments. However, apart from processing the payments, it was not alleged in the case that JPM knew about or was in any way involved in the alleged fraudulent scheme.

The FRN sought damages against JPMC for alleged breach of its Quincecare duty, namely for the sum of the payments it claimed had been vitiated by fraud.

The Decision

The court held that the payments had not emanated from a fraudulent scheme and that the recipient of the funds received them legitimately. Accordingly, JPMC was not on notice of any fraud to which the Quincecare duty would apply.

Given the stark conflict between the Quincecare duty and a financial institution's principal obligation to comply with its client's instructions, the Court sought to limit the scope of the Quincecare duty by clarifying that:

• The duty arises only in relation to payment instructions.
• The financial institution must be on notice that the payment instruction in question is an attempt to misappropriate the client's funds. It is not sufficient to show that the financial institution was on notice of a fraud which related to another aspect of the transaction.

However, the Court did indicate that for the Quincecare duty to be engaged, the payment instructions need not originate from an external or authorised agent of the client and could potentially be engaged even when the instructions came from the client itself.

In determining whether the financial institution was on notice of a fraud, the Court will apply an objective standard. The question that will be asked is, "whether, if a reasonable and honest banker knew of the relevant facts, he would have considered that there was a serious or real possibility, albeit not amounting to a probability, that its customer might be being defrauded".

Looking forward

This decision offers welcome clarification to the scope of the Quincecare duty. It provides banks and other financial institutions with a degree of comfort that the circumstances in which liability may arise under the duty are limited to the payment instructions they receive. If the financial institution is put on notice of other forms of fraudulent conduct, for example relating to the payor's prior conduct, or if the concerns are vague in nature, this will not engage the Quincecare duty.

However, financial institutions cannot ignore such red flags and should continue to comply with their broader Anti-Money Laundering and other regulatory obligations, following best practices to ensure that their clients are not being defrauded. Financial institutions must still respond to red flags whenever they may be triggered, for example by filing Suspicious Activity Reports where necessary, as occurred in this case.

Footnotes

1. The Federal Republic of Nigeria v JP Morgan Chase Bank, N.A. [2022] EWHC 1477 (Comm)

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