Ruling highlights process for banks concerned about fraud

Out-Law News | 01 Aug 2019 | 11:42 am | 2 min. read

A currency exchange has used the Civil Procedure Rules to have a court decide whether it should pay money to a client which it suspects is part of a fraud.

Global Currency Exchange Network (GCEN) asked the court to rule on whether there were legitimate 'competing claims' to the money under CPR 86, which can be used in claims involving possible fraud.

CPR 86 allows a company to ask the court to decide who should be paid money or a debt where more than one party claims it. The money in this case was frozen in connection with an alleged Ponzi scheme, a kind of fraud.

Claims filed under CPR 86 are known as stakeholder or interpleader applications, and can be used to resolve questions of what a person or company should do with funds it is holding on behalf of others.

Global Currency Exchange Network (GCEN) believed that funds it held on behalf of its client Osage 1 could have been procured from investors by deceit, misrepresentation or unlawful mis-selling practices, and that Osage 1 could have been operating a Ponzi scheme.

CPR 86 applies where competing claims are made or expected to be made in money or assets. The judge ruled that this language meant that it was possible for a claim to be anticipated even if it had not yet been asserted.

As GCEN had reasonable grounds to suspect the funds represented a benefit obtained by criminal conduct, the judge said there was a “real foundation” for expecting competing claims to be made.

Civil fraud expert Bill Geiringer of Pinsent Masons, the law firm behind Out-Law, said that banks could use this process to help them decide whether to pay money out or not.

 “If there are concerns that paying away monies will be in breach of a duty or statute and expose the institution to a liability, the Part 86 procedure will allow direction from the court to give reassurance and comfort to decision makers,” Geiringer said. “The process is of great assistance where potential competing claims from numerous investors can create confusion for the financial institution, particularly where there are suspicions that the investment scheme is fraudulent."

The judge also discussed the issue of Quistclose and resulting trusts. It was agreed that GCEN initially held the money on the basis of a 'Quistclose trust', requiring it to hold the funds on behalf of investors until it had completed its money laundering checks and then to pay the funds to Osage. 

However, since the investors’ money could not be released by GCEN to Osage for fear of breaching a duty or statute, the judge said there was a viable argument that GCEN held the money on resulting trust for the investors.

The judge also said that if a company holding money paid it out to a fund after it became clear that there might be grounds for an investor to cancel or rescind their investment in the fund, then that company could be liable to pay back the original investor, although he made no conclusions on this on the GCEN case.

“The ruling therefore assists both the institution and the investors by highlighting a process whereby the court can intervene to ensure monies are directed in the interests of justice,” said Pinsent Masons civil fraud expert Alan Sheeley.