Last month the UK Privy Council delivered an important decision on the extent to which a bank is obliged to make inquiries into the underlying commercial purpose of offshore financial arrangements.

Background

1. Crédit Agricole Corporation and Investment Bank (Appellant) v Papadimitriou (Respondent) (Gibraltar)
2. The appeal concerned a proprietary claim to proceeds of sale from a valuable art-deco furniture collection.
3. A valuable art deco furniture collection was fraudulently sold by a partner of a family member who had been in possession of it at the time of his death (but who was not the owner).
4. The US proceeds of sale were paid to two Panamanian companies, then paid into the bank through a Liechtenstein Foundation owned by the fraudster, then deposited in the Gibraltar branch of the Bank into an account belonging to a BVI company for the purpose of providing a guarantee for the fraudster’s London facility.

Key facts

1. The Appellant, the Gibraltar branch of a French bank, had appropriated a security deposit in satisfaction of an overdrawn account.
2. The deposit comprised the proceeds of stolen antiques belonging to the Respondent.
3. The Respondent asserted a proprietary claim to the proceeds, which the bank defended by contending it was abona fide purchaser without notice.
4. The bank succeeded at first instance but lost in the Court of Appeal.
5. The Privy Council held that, to avoid having constructive notice of a proprietary right, a  bank must make inquiries if the facts known to it would give a reasonable banker in its position serious cause to question the propriety of the transaction in question.
6. The Privy Council found that the Bank, which had omitted to enquire as to the commercial purpose of the transaction, had failed to make appropriate enquires which would have revealed that the transaction was probably improper.
7. It was accordingly not able to defeat the Respondent’s claim.

Observations

1. The Privy Council accepted the lower court’s conclusion that the use of a web of legal entities and its attendant cost should have alerted a reasonable bank to the improper motive namely to launder the proceeds of sale.
2. Merely inquiring about the source of the funds rather than the underlying commercial purpose behind the arrangements was insufficient to displace the bank’s constructive notice of impropriety.
3. Various tests were suggested for establishing constructive notice of impropriety:

1. The bank must make inquiries if there is a serious possibility of a third party having such a (proprietary) right or, put in another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction….
2. In the present case, on the facts actually known to the bank, there was no apparent explanation of the interposition of the Panamanian and Liechtenstein entities unless it was to conceal the origin of funds derived from third parties.
3. That was why the bank had to make inquiries before proceeding as if there was an innocent explanation.

– A copy of the decision in Crédit Agricole Corporation and Investment Bank (Appellant) v Papadimitriou (Respondent) (Gibraltar) is here. http://bit.ly/1IQVcDW

See more at: http://bit.ly/1dmpQtw