A UK Court has ruled that a bank that re-transmitted a suspiciously
large CHAPS transfer back to the sending bank is liable to the
customer into whose account the transfer should have been made.
The case reaffirms the view that a CHAPS transfer is as good as
a cash payment - but also highlights a risk that can arise if
compliance with the UK's money laundering rules is taken too
far.
CHAPS, or the Clearing House Automated Payment System, is a
method of transferring cleared funds from one bank account to
another, and is often used in business and legal transactions,
where real time transfers are necessary.
The case concerned Hosni Tayeb from Tunisia, who had been
running the top level internet domain for Libya, prior to
negotiating the sale of the domain database to the Libyan
Corporation General Posts and Telecommunications Company
(GPTC).
On 21st September 2000, GPTC's solicitor instructed the CHAPS
transfer of the purchase price - £944,114.27 - from a Barclays Bank
account into Tayeb's newly opened HSBC account. Barclays informed
HSBC that the payment was going to be made, and then initiated the
transfer of the money.
This arrived into the account, and an automatic acknowledgement
was sent to Barclays confirming the receipt of the money.
On the assumption that the transferred purchase price had also
been credited into his HSBC account, Tayeb completed the sale of
the database.
However, the HSBC branch assistant manager, Mr Wigham, had been
suspicious about the transfer, and placed a marker on the account –
effectively preventing any withdrawals from the account without the
bank's approval.
According to court papers, a day later, after meeting with
Tayeb, Mr Wigham arranged for the money to be re-transferred back
to the Barclays account from which it had come. He then closed the
account, and cancelled the interest that had accrued in the short
time that the database purchase price had been credited there.
As Mr Justice Colman said in his ruling, "The position therefore
appears to be that GPTC have received delivery of the domain name
database but, having initially remitted the price to HSBC, have, by
the re-transfer, received a windfall payment equivalent to the
price."
Tayeb sued the bank.
In its defence, HSBC argued that the suspicious circumstances of
the transfer justified its actions. In particular, the bank was
concerned that it would commit an offence under the Criminal
Justice Act 1988 and that it would breach the Money Laundering
Regulations.
The main question for the court was whether the money had
actually been transferred into Tayeb's account, or whether the bank
had retained sufficient control over the money to enable it to
re-transfer the money back to Barclays.
The ruling
According to Justice Colman, "There is a continuing duty on the
bank to credit to the account all such transfers it receives from
external sources and which comply with the terms subject to which
the account is constituted."
"However," he continued, "the bank's entitlement to decline to
accept a transfer is not in the nature of an option exercisable
according to the bank's perception of what is commercially
desirable but the consequence of the operation of the terms of the
account contract with its customer."
Worries about breaching the 1988 Act and Money Laundering
Regulations were not sufficient to allow HSBC to decline to accept
the transfer because an offence would not be committed so long as
the bank reported their suspicions to the National Criminal
Intelligence Service.
"The proposition that by reason of its justifiable suspicions,
the bank retained an overriding discretion to reverse the transfer
into the account after the 12 noon deadline on the next banking day
on the basis of banking practice has not been established on the
evidence," said Justice Colman.
"Any such practice would not only be fundamentally inconsistent
with the bases of the contract with its customer and with the CHAPS
rules, as I have demonstrated, but would go well beyond what was
reasonably required either for compliance with the Criminal Law or
for the reasonable protection of the bank against the risk of
liability as a constructive trustee," he added.
This meant that once the funds were credited into Tayeb's
account, had been authenticated and the acknowledgment sent, "HSBC
became indebted to the Claimant in respect of the transfer".
The fact that the bank had placed a marker on the account,
freezing it, did not withdraw the debt due to Tayeb – it simply
prevented him from accessing the funds.
Accordingly the bank was now due to pay Tayeb the purchase
price, plus interest.
