2007
The Australian Parliament passed the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 on 7 December 2006. It received the Royal Assent on 12 December. The purpose of the Act is to implement the “40 + 9” recommendations of the Financial Action Task Force (“FATF”): see Weaver and Craigie, The law relating to banker and customer in Australia, third ed, 2003, Thomson Lawbook Co, para 2.3528ff for a discussion of the 40 + 9 Recommendations.
The Act was amended in February to change some of the offences from “absolute liability” to “strict liability”.
The AML/CTF Act is applicable to a wide range of business types and sizes. It is very difficult to draft a “one size fits all” legislative scheme. The solution is a structured “risk based” approach where the business or business group undertakes a “risk analysis” to identify the money laundering and terrorist financing risks inherent in the services offered and the nature of the customers served.
This leads to the following structure:
Regulatory objectives are set out in the AML/CTF Act, and
details on meeting the objectives are set out in regulations known as the AML/CTF Rules.
The AML/CTF Rules were finalised on 30 March. Some Rules commence on 12 June, others on 12 December 2007. The AML/CTF Act has a staged implementation oner 24 months as set out in s 2.
For the present purposes, the important part of the Act and the Rules are the so-called “know your customer” rules. These include original identification procedures, but more importantly, s 36 imposes an obligation of “ongoing customer due diligence”.
This article examines the effect of extended KYC obligations on financial institutions wishing to rely on the defence provided by s 95 of the Cheques Act 1986.
Section 95 of the Cheques Act 1986 provides financial institutions with a special defence to an action in conversion. To establish the defence, the defendant institution must show three essential elements:
the cheque was collected in good faith
the institution collected the cheque on behalf of a customer, and
the cheque was collected without negligence.
Good faith is seldom an issue since s 2 of the Act provides that an act is done in good faith if it is done “honestly” whether or not the act is done negligently.
A person is a “customer” if the collection is being performed as part of the banker-customer contract or, perhaps, in contemplation of forming the contract. A person may be a customer at the time when the first transaction is made. In Ladbroke & Co v Todd (1914) 30 TLR 433 the rogue was held to be a “customer” even though there was only one transaction during the entire banker-customer relationship.
On the other hand, custom alone is not sufficient to make the person a “customer”. In Great Western Railway Co Ltd v London & County Banking Co Ltd [1901] AC 414 a man had for some years been cashing cheques over the counter at the defendant bank. It was held that the man was not a “customer” since he had no account with the bank and neither party had any intention of establishing an account.
Most s 95 cases succeed or fail on the question of whether the cheque was collected “without negligence”. “Negligence” in this section has nothing to do with the tort of negligence. Courts often say that there can be no general definition, and just as often proceed to offer one. The most quoted general definition is in Commissioner of Taxation v English Scottish and Australian Bank Ltd [1920] AC 683 where Lord Dunedin said (at 688):
…the test of negligence is whether the transaction of paying in any given cheque [coupled with the circumstances antecedent and present] was so out of the ordinary course that it ought to have aroused doubts in the bankers’ mind, and caused them to make inquiry.
In any particular case, the court will consider a number of “factors” in deciding if the collection was without negligence: see Weaver and Craigie, The law relating to banker and customer in Australia, third ed, 2003, Thomson Lawbook Co, para 9.6710ff.
Two factors are of special importance for current consideration: circumstances surrounding the opening of the account
circumstances surrounding the opening of the account, and
unusual operation of the account.
It is very difficult to commit cheque frauds without an account. This alone means that the opening of an account will be a factor when determining if a cheque has been collected without negligence.
One of the most difficult situations is an account which is opened with a crossed cheque. Since a rogue will find it almost impossible to deal with a crossed cheque without an account, an account opened in this way should be treated very carefully.
The classic example of this is Ladbroke & Co v Todd (1914) 30 TLR 433. A rogue intercepted a crossed, “account payee only” cheque and forged an indorsement. The rogue explained that he had another account but that the cheque was the proceeds of gambling and he did not wish to pass it through the existing account. The defendant bank opened an account on the basis of this explanation and a comparison of the rogue’s signature with that of the indorsement. The court held that the cheque had not been collected without negligence.
It might be thought that the account opening requirements of the Financial Transaction Reports Act 1988 would have solved these account opening problems. Voss v Suncorp-Metway Ltd (No 2) [2003] QCA 252 shows that it is not so, even though the defendant institution claimed that its account opening procedures followed industry practice.
There are aspects of account operation which clearly signal rogue activity: an account that has been dormant suddenly shows a lot of activity, an account that has always been used for small transactions is suddenly used for large ones. These types of activities are danger signals and may be used to show that a cheque was not collected without negligence.
There are a small number of cases where the bank’s success or failure has been influenced by account activity. In Australia, this was recognised as long ago as Commissioners of State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457 where Griffith CJ said (at 479):
…what might in the case of an account current in a commercial bank pass as an ordinary payment in of a cheque, subject to a business adjustment between the depositor and the drawer of the cheque, might well be so far out of the ordinary course of a savings bank deposit as to excite suspicion or raise a demand for inquiry in the minds of the officials.
A sudden increase in the account can be a warning sign. In Lumsden v London Trustee Savings Bank [1971] 1 Lloyd’s Rep 114 the customer had an account of less than £900 after two months of operation. In the following five weeks, there were deposits of more than £5000. The Court noted that the bank should have been put on inquiry.
In Crumplin v London Joint Stock Bank Ltd (1913) 109 LT 856 the account had had few transactions, nearly all less than £30. A fraudulent clerk then began to use the account for speculation, forging indorsements on misappropriated cheques. The Court noted that the bank should have made inquiries, bu see Commissioner of Taxation v English Scottish and Australian Bank Ltd [1920] AC 683.
In Nu-Stilo Footwear Ltd v Lloyds Bank Ltd (1956) 7 LDAB 121 the court found no negligence in opening the account which was then used for a series of cheque frauds. The first cheque was for £172. There were no further cheques for a month until a cheque for £550 was deposited. The Court found that the first cheque was collected without negligence but that the second and later cheques were not since the size of the cheques was “out of harmony with the description of [the rogue’s] trade or prospects as revealed by him to the bank”.
For other examples, see Lloyds Bank Ltd v Chartered Bank of India, Australia & China [1929] 1 KB 40, Orbit Mining and Trading Co Ltd v Westminster Bank Ltd [1963] 1 QB 794, Midland Bank Ltd v Reckitt [1933] AC 1, Motor Traders Guarantee Corp Ltd v Midland Bank Ltd [1937] 4 All ER 90 and Voss v Suncorp-Metway Ltd (No 2) [2003] QCA 252.
Section 36 of the AML/CTF Act provides for “ongoing customer due diligence”. The financial institution must monitor its customers in relation to the provision of services with a view to identifying, mitigating and managing the risk of the customer using the service for money laundering and/or terrorist financing.
Where the service provided is that of a current account with cheque facilities, this clearly involves monitoring customers activities with respect to the account and, indeed, with respect to all of the accounts held by the customer. The institution may not treat the account as an isolated service provided to the particular customer.
An example of the way that KYC may change the institution’s obligations is provided by Orbit Mining and Trading Co Ltd v Westminster Bank Ltd [1963] 1 QB 794. Harman LJ said that the banker should clearly be concerned with the occupation of the customer when the account is opened, but that there is no general duty to be informed of changes in employment or in status. The KYC provisions of the AML/CTF legislation may change that since there is an ongoing obligation to be informed of the customer’s affairs.
The AML/CTF obligations will extend the obligations on an institution which collects cheques on behalf of its customers. We can expect to see more cases similar to those discussed in the preceding section, and we can expect to see the importance of account operation increase.