ALEX JAY, PARTNER, GOWLING WLG FRAUD IN THE FINANCIAL SERVICES SECTOR RECENT DEVELOPMENTS IN POLICY AND LAW

JOINT FRAUD TASKFORCE Launched by Theresa May on 10 February A collaboration between industry, government and law enforcement, developed to strengthen the collective response on fraud. o To include the Home Office, the City of London Police, the National Crime Agency, Financial Fraud Action UK, the Bank of England, Cifas and the chief executives of the major banks. Aiming to make it more difficult for fraudsters to operate by sharing intelligence and closing the loopholes which they exploit. Priorities for the new taskforce: o Developing a better understanding of key threats; o A focus on high nominal harm; o Improving fast track intelligence sharing between banks and law enforcement agencies; o Speeding up the identification of victims; and o Identifying and tackling the vulnerabilities that fraudsters depend on.

JSC BTA BANK V MUKHTAR KABULOVICH ABLYAZOV [2013] EWHC 3691 (CH) Background / facts One of a number of recent cases in which JSC BTA Bank (a Kazakh bank) has sued it's former managing director and other former executives in respect alleged frauds and misappropriations carried out before and after their removal from office (internal fraud). This concerns misappropriation of bank assets via a network of BVI companies, of which the MD was ultimate beneficial owner. Outcome / status Following a summary judgement application the total amount (US$294,138,715.27) claimed was ordered to be paid by the defendant. This case is on-going however the more recent judgements concern the enforcement of the freezing injunction. The application succeeded because the beneficial ownership of the BVI companies was established in the committal proceedings and the fraud was established through the following facts: o the securities were transferred for no consideration to the BVI companies; o SPAs were later produced and back-dated and signed by a member of the banks management board after he had been dismissed (therefore with no authority); and o loss to the bank was quantified by the market value of the securities at the time of the transfer.

JSC BANK OF MOSCOW V VLADIMIR AMBRAMOVICH KEKHMAN, AND OTHERS (BVI COMPANIES) [2015] EWHC 3073 (COMM) Background / facts The claim concerns conspiracy to defraud the bank by diverting assets and business opportunities (worth $411 million) through a number of companies controlled by the defendant away from the ‘borrower companies’ who had given guarantees based on fraudulent misrepresentations which induced the bank to loan $150 million to the ‘borrower companies’. The companies and those making the representations were all under the control, instruction or accountability of the defendant. External fraud. Outcome / status It was stated that for a valid plea of fraud the claimant did not have to plead primary facts which were only consistent with dishonesty, the correct test was whether, on the basis of the primary facts pleaded, an inference of dishonesty was more likely than one of innocence or negligence. Application for summary judgement or strike out was rejected and the claim is to proceed to trial.

CLYDESDALE BANK PLC V WORKMAN [2016] EWCA CIV 73 Background / facts The Clydesdale Bank were suing solicitors who were retained by a development company which was selling plots of land. The development company had failed to register a mortgage in the name of the bank which was created when the land was purchased. The solicitor became aware of the mortgage and informed the developer of its need for registration but unbeknown to the solicitor the developer took a second loan from a connected person and registered a first charge so that the priority of the banks equitable charge was postponed. On the sale of the property and on the instructions of the developer the solicitor transferred the proceeds to the connected person in satisfaction of their charge. Outcome / status The High Court judge found the solicitors to be dishonest but the Court of Appeal allowed an appeal because they stated that honesty was assessed against what the solicitors believed the facts to be, the critical element being whether they had knowingly defeated the banks legitimate interests. The solicitors believed the banks legitimate interests were whatever remained of the proceeds of sale after the legal mortgage had been discharged and further that recklessness was evidence of dishonesty but not equivalent to it in the area of law in question.

ALDERMORE BANK PLC V RANA [2015] EWCA CIV 1210 Background / facts As part of a re-mortgaging arrangement a mortgage advance was released from the banks solicitor to the borrowers solicitor, pursuant to an undertaking that it would be used to satisfy and redeem the outstanding charges on a property. The borrowers solicitor misappropriated the funds instead of fulfilling undertaking to redeem charges. Hence, the charges were never redeemed, the bank had no security and the borrower had not received the funds. Outcome / status It was found that the borrower had never become contractually liable because the mortgage transaction had never been and the banks appeal was dismissed. This case centres more on the technical terms of the property transaction rather than a finding for fraud as the defendant borrower had not carried out or benefitted from the fraud.

WILLIAMS V CENTRAL BANK OF NIGERIA [2014] UKSC 10 Background / facts The claimant claimed to be a victim of a fraud in which he was induced to pay $6.5 million to an individual who was to hold the money on trust for him and that in fraudulent breach of trust that money had been paid in to the defendant bank and therefore the bank was party to the fraud. The bank appealed the Court of Appeal's decision in which it was found that an action brought against it was not was not time barred under the Limitation Act 1980 owing to s21(1)(a) on the basis of the equitable principle that there is no limitation on a trustees equitable duty to hold trust assets for the benefit of the beneficiaries. Outcome / status In the Supreme Court the dissenting Lords held that the appeal was allowed and made the distinction between constructive trustees who had lawfully assumed the fiduciary obligations in relation to trust property (‘true trustees’) and constructive trustees who had never assumed the status of trustee but who has exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. It was decided that the equitable and everlasting limitation and section 21(1)(a) of the Limitation Act was only concerned with the former 'true trustees'. Since the bank fell under the latter category of constructive trustee the Limitation Act applied to the claimant in the usual sense and s21(1)(a) exception had no application therefore the claim was time- barred.

PROPERTY ALLIANCE GROUP LTD V ROYAL BANK OF SCOTLAND [2015] EWHC 3272 Background / facts The matter involves allegations of the mis-selling of swap contracts which were referable to LIBOR by the bank and misconduct and fraudulent mis-representations in relation to LIBOR on the banks part. Outcome / status This is currently in an interim phase and over the past year there have been a number of applications in relation to the admissibility of evidence.

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