Bank liable for reversing suspicious CHAPS transfer

If a bank is concerned that a payment credited to a customer account by means of a CHAPS transfer is "suspicious", it is not entitled the bank to return the funds to the source from which they came. If the bank does return the funds to the originating source, it is likely to be held liable to the customer in a debt action.

In Tayeb –v- HSBC Bank plc [2004] EWHC 1529 (Comm) (5/7/2004), the court held that, once a customer's account has been credited, the bank becomes indebted to the customer in the usual way for the value of the transfer. This liability to the customer cannot be avoided by the bank returning the suspicious funds and claiming that it:

• Has obligations, or is potentially exposed, under sections 93A to 93D of the Criminal Justice Act 1988 (together with the Money Laundering Regulations 1993) for having received the proceeds of criminal conduct; or
• That it is at risk of a later being found to have had sufficient suspicion or knowledge to make it liable to a third party as a constructive trustee.

In relation to the risk associated with the Criminal Justice Act, there is nothing in those provisions that obliges an innocent recipient of suspicious funds to return them to the transferor. The bank avails itself of the statutory defence by reporting the suspicious transaction, not by returning the funds.

The court also found that placing a "marker" on, or "freezing", the account (thereby preventing the customer from making a withdrawal) does not mean that the funds have not been received. Although this inhibits the customer's dealings on the account, the debt owed by the bank to the customer remains unaffected. If the bank is concerned that the funds are about to be transferred out of the account, it can temporarily freeze the account and inform NCIS, but with proper regard to the offence of tipping off. The court acknowledged that banks may find themselves in a muddle on occasions, caught between their Money Laundering obligations on the one hand and their obligations to their customer on the other. On those occasions, the bank may wish to consider approaching the court, without notice, for an interim declaration as to how to proceed.

For further information please contact Mathew Carey on(020) 7367 2457 or at [email protected]