ARTICLE
20 August 2012

Duty Of Care Of Banks Towards Third Parties, Help For Practice

Kv
Kennedy van der Laan

Contributor

Kennedy van der Laan
On 13 July 2011, the Court of Rotterdam ruled in a dispute between Stichting Belangenbehartiging Gedupeerde Beleggers Van den Berg (Foundation Representation of Interests of Aggrieved Investors of Van den Berg) (the ‘Foundation’) as claimant and ABN AMRO Bank N.V. (legal successor of Fortis Bank (Nederland) N.V.) (the ‘Bank’) as defendant
Netherlands Finance and Banking

Court of Rotterdam 13 July 2011, LJN BR1592 / JOR 2011, 335

The Parties

On 13 July 2011, the Court of Rotterdam ruled in a dispute between Stichting Belangenbehartiging Gedupeerde Beleggers Van den Berg (Foundation Representation of Interests of Aggrieved Investors of Van den Berg) (the 'Foundation') as claimant and ABN AMRO Bank N.V. (legal successor of Fortis Bank (Nederland) N.V.) (the 'Bank') as defendant.

The Facts

Q (who was director of two companies engaging in the trade in foreign exchange and securities until 8 March 2005) held two (private) payment accounts with the Bank until 24 March 2005. Q used these payment accounts for 'Ponzi's swindle', swindle in which the swindler pockets monies deposited and pays monies received from newly attracted investors as 'return' to earlier investors.

In the period from 2002 to July 2005, approximately 1,440 investors (of which 687 have united in the Foundation) have deposited a total of EUR 67 million with Q by means of transfers to the above-mentioned payment accounts. The transfers concerned amounts up to EUR 600,000, with descriptions such as 'deposit', 'investment', 'loan' and 'warrant'.

In the same period Q paid a total of EUR 77.5 million to third parties through both payment accounts. For these payments Q used both transfer orders by telephone and handwritten transfer forms and he had frequent contacts with employees of the branch of the Bank in Hilversum. On 24 March 2005 the Bank terminated the relationship with Q and on 15 June 2005 Q was declared bankrupt.

Legal Question

The starting point that the social function of a bank entails a special duty of care towards third parties whose interests it has to take into account on the basis of the rules of unwritten law that are considered acceptable in social and economic life has already been confirmed by the Dutch Supreme Court various times (inter alia in the famous Safe Haven judgment), and is not under discussion in these proceedings. What is under discussion is the scope of the duty of care of banks towards third parties. More specifically, the parties are divided on the answer to the question as to when an obligation to make further investigations arises for a bank.

Positions of the Parties

The Foundation accuses the Bank of violation of its social duty of care towards the investors, since it facilitated Q's Ponzi's swindle by (i) making the two payment accounts available and because (ii) the Bank, in view of the unusual nature and extent of the payment transactions through these two accounts, should have intervened earlier.The Foundation claims a declaratory judgment that the Bank has acted unlawfully towards the aggrieved investors.

The Foundation substantiates its position with the argument that in the light of the nature and extent of the transactions, the Bank should have conducted an investigation. The Foundation brings forward a number of arguments, namely (i) the fact that the payment accounts were private accounts, (ii) the large scale of the payment transactions in the period 2002-2004 (an average of 22 transactions per day in 2004), (iii) the sizes of the amounts deposited (as mentioned, up to EUR 600,000), (iv) the descriptions with the transfers into the account (see above), (v) the number of credit transfers by Q to other accounts, and (vi) the manner of transferring, in which there was frequent contact between Q and the bank employees. The Foundation furthermore substantiates its position by pointing out that the Bank was actually also able to identify deviating transactions, because on the basis of the CDD regulations (Customer Due Diligence within the framework of integrity policy and to prevent money laundering and terrorism), the Bank is obliged to design its administration in such a way that deviating transactions are detected.

The Bank recognizes that the money transfers through the accounts 'were highly unusual'. However, the Bank is of the opinion that the mere fact of highly unusual money transfers is not sufficient to require the Bank to conduct investigations, because the traffic through payment accounts is largely automated. With regard to the involvement of the bank employees, the Bank has brought forward that it is not the task of these employees to pay attention to the nature and extent of payment orders.

Adjudication of the Court

The Court has made short shrift of the Bank's defense. The Court has considered that (in this specific case) the Bank could not hide behind the fact that transactions through payment accounts are largely automated, since in this specific case the nature and the extent of the payment transactions was not an isolated case. The Bank was actually aware of (in any case) the payment orders of Q, which he would place by telephone or by handwritten forms, which forms he delivered to the branch of the Bank in Hilversum. Regarding many transfers, Q had contact with an employee of the Bank, either a switchboard operator or his contact person at the branch in Hilversum.

The argument of the Bank that it is not the task of these employees to pay attention to the nature and extent of payment orders was of no avail to the Bank. The Court has ruled that the Bank could not hide behind a limited task of its employees without restraint. In this context, the Court has pointed to the fact that involvement of the employees of the Bank went significantly beyond the routine handling of handwritten transfer forms. In the opinion of the Court, the actual knowledge (employees of) the Bank had of the excessive extent of the payments from the payment accounts should have prompted the Bank to investigate the money transfers through the payment accounts.The Bank has not been alerted by the extraordinary nature of the payments and has not investigated the money transfers through both accounts, although it should have seen a reason to do so. Thus, the Bank has acted in conflict with its social duty of care.

Conclusions

A number of general criteria can be deduced from this judgment in order to determine when it may be expected of a bank to conduct an independent investigation with respect to payment transactions. The nature and extent of the transactions, the capacity of the client (private or business), and the manner of processing transactions (and involvement of bank employees) play a large role in this respect.

It also follows from this judgment that a bank would do well to instruct its employees on how to deal with signals of unusual transactions. Knowledge of employees is generally attributed to the bank, irrespective of the position of the employee concerned. Therefore, if employees become aware of unusual transactions, this must lead to an investigation by the bank.

First published in the Kennedy Van der Laan newsletter - January 2012

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.

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