The Liabilities of Financial Intermediaries and Their Advisers for Handling the Proceeds of Crime

Pages227-238
Date01 March 2002
Publication Date01 March 2002
DOIhttps://doi.org/10.1108/eb026021
AuthorMichael Brindle
SubjectAccounting & finance
Journal of Financial Crime Vol. 9 No. 3
The Liabilities of Financial Intermediaries and Their
Advisers for Handling the Proceeds of Crime
Michael Brindle
This paper considers the rules of English law which
apply to fix financial intermediaries and their advisers
with liability for handling the proceeds of crime.
Consideration of this topic falls into two distinct
parts.
This paper looks at responsibility in civil law,
including liability for breach of contract; liability as
constructive trustee; liability for money had and
received; equitable tracing and other liabilities. It
then examines issues of criminal responsibility, and
closes with consideration of an anomaly.
CIVIL LAW
Liability for breach of contract
In many situations a bank or other financial inter-
mediary holds money belonging to another on the
basis of a contractual relationship conducted on
terms equivalent to that of banker and customer.
For example, a company holds an account with a
bank; the account mandate authorises each of its
directors to sign cheques/give payment instructions
in relation to the account; one of the directors frau-
dulently misapplies the company's funds by writing
cheques in favour of entities with which he is
connected, otherwise than for the purposes of the
company's business.
In situations such as this the bank or other inter-
mediary is liable where he is in breach of an implied
term of the contract that he will not without enquiry
honour instructions received within mandate where
he knows facts which would lead a reasonable and
honest person in his position to consider that there
was a serious or real possibility that the person
giving the instructions might be acting in fraud of
the company.1 To establish breach of such a duty
the customer must prove what amounts to a form
of negligence; he need not prove fraud or dishonesty.
Nonetheless the obligation does not set too high a
standard of care on the part of bankers or other
intermediaries holding funds, as was stressed in the
Quincecare case at
376c-f.
This type of liability does not arise where the bank
or other intermediary receives what are the proceeds
of a fraud. It is essentially concerned with situations
where a fraud, which may amount to a crime, is con-
ducted by an agent who is mandated to operate an
account against his principal. In this sense only does
this form of liability constitute a risk arising from
the handling of the proceeds of crime.
Liability as constructive trustee
This form of liability is much more directly relevant
to intermediaries and their advisers who might
handle the proceeds of crime. This form of liability
arises in situations where individuals or entities with
whom the intermediary has dealings are themselves
engaged in wrongdoing against third parties. In
such situations the client will often be the perpetrator
rather than the victim of a fraud. Liability as a con-
structive trustee can arise under two heads, namely
knowing or dishonest assistance and knowing
receipt.2
Dishonest assistance
Liability of a defendant as a constructive trustee arises
where there is a primary wrongdoer who acts in
breach of trust or fiduciary duty, the defendant assists
the primary wrongdoer so to act and in so doing the
defendant behaves dishonestly.3 This head of liability
used to be known as 'knowing assistance' but after the
clarification of the law in the Tan case it is better
described as 'dishonest assistance', reflecting the
need in all cases for the requirement of dishonesty
to be satisfied.
Although the assisting party must act dishonestly,
it is not necessary that the primary wrongdoer
should himself have been dishonest, provided he has
acted in breach of trust or fiduciary duty. It is not
necessary that the assisting party should ever have
received any property or assets misapplied by the pri-
mary wrongdoer in breach of trust, although the
assisting party very often will have received property
in a non-beneficial capacity as part of the role played
in the handling of misapplied funds. Beneficial receipt
is dealt with under the concept of 'knowing receipt'
discussed below. Whether or not the assisting party
has received funds ministerially, his liability is a
Journal of Financial Crime
Vol.
9, No. 3, 2002 pp. 227-238
Henry Stewart Publications
ISSN 1359-0790
Page 227

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