APP fraud: Commercial Court considers approach to unjust enrichment and knowing receipt claims

The recent Commercial Court decision of Tecnimont Arabia Limited v National Westminster Bank PLC(1) considered the court's approach to a claim for unjust enrichment against a recipient bank in an authorised push payment (APP) fraud context.

Facts 

The Claimant, Tecnimont Arabia Limited ("TAL"), is a company operating in Saudi Arabia and is part of a multi-national Italian corporation. On 30 October 2018, as a result of deception on the part of a fraudster, TAL instructed its bank to pay US $5 million to a dollar account held at the National Westminster Bank ("NatWest") in the name of a third-party, Asecna Limited (the "Account"). The Account was controlled by the fraudster who subsequently dispersed the majority of the funds over the following two days to various accounts in different countries.

NatWest had received and acted upon fraud alerts before the final payments were made out of the Account. On 31 October, NatWest received two automatic fraud alerts at 10:10am and 1:04pm, respectively. These alerts resulted in online banking services being suspended temporarily. However, after investigation, online banking services were resumed in both cases. By 11:56am on 1 November, NatWest had become aware of the fraud, but one final payment was made out of the Account on the same day at 3:44pm. NatWest's anti-money laundering fraud detection systems also triggered an alert in respect of the Account on 11 November.

Claims

TAL brought claims against NatWest for unjust enrichment and knowing receipt.  An unjust enrichment claim requires consideration of four key questions: (i) has the defendant benefitted or been enriched; (ii) was the unjust enrichment at the expense of the claimant; (iii) was the enrichment unjust; and (iv) is there any specific defence available to the defendant?

NatWest argued that, if enrichment had occurred, it was not at TAL's expense because the payment from TAL to the Account was not direct (as it was an international payment, the money sent by TAL passed through numerous other accounts in the course of processing the payment). The relevant transfer was an offshore transfer in US dollars from Saudi British Bank SJSC in Saudi Arabia (“SABB”), via Citibank in the US as SABB’s correspondent/intermediary bank, to NatWest in London, communicated using SWIFT messages.

NatWest also sought to rely on the defences of 'change of position' and 'ministerial receipt'. TAL argued that these defences were not available to NatWest and, in particular, that the bank could not rely on the defence of 'change of position' because it had not acted in 'good faith' (Niru Battery Manufacturing Co v Milestone Trading Ltd²  ). TAL argued that this was the case i) by reason of the design and operation of NatWest's fraud detection systems, ii) because the second automatic fraud alert was dealt with outside NatWest's usual processes, and iii) because NatWest had direct knowledge of the fraud when the final payment out was made.

TAL argued that any enrichment was 'unjust' as it had arisen as a result of a mistake. NatWest, on the other hand, submitted that TAL ran the risk that the payment was a fraudulent payment or "shut its eyes" to that risk. The issue was essentially one of fact.

Decision 

Knowing receipt 

In his judgment, the Judge (Bird J) stated that it was established law that, if the transferred property is not trust property, there can be no liability for knowing receipt³. TAL argued that the transferred funds represented trust property because the transfer itself was procured by fraud. However, the Judge did not agree, finding that "The claimant paid away monies acting under a mistake induced by the deceit of a third party. In my judgment, the defendant is right to submit that the property was not trust property at the time it was received." 

The Judge also noted that NatWest received the deposit for its customer and not for its own account and there was, therefore, no valid claim for knowing receipt (in the case of Twinsectra v Yardley⁴, Lord Millett stated that a cause of action based on knowing receipt only arises where the defendant received or applied the funds in breach of trust for his/her own use).

Unjust enrichment 

Was the unjust enrichment at the expense of the claimant?

The Judge stated that the purpose of the “at the expense of” element is to check that there has been a “transfer of value” in the sense that the defendant has received a benefit from the claimant and the claimant has suffered a loss or detriment through his provision of that benefit. The Judge considered that there are at least four ways in which a claimant can satisfy the court that the defendant has been unjustly enriched at its expense (assuming there to be a “transfer of value”):

1. The claimant and the defendant had direct dealings.
2. The claimant and the defendant did not have direct dealings, but the substance of their dealings was such that the law would treat them as direct.
3. The claimant and the defendant dealt with each other’s property.
4. The claimant could trace an interest into property provided to the claimant by a third party.

In relation to the second way (considering whether the transactions should be treated as a direct transfer), the Judge found the following to be relevant: 

• The analysis must focus on the transactions and not the effect of the transaction. This reflects the need to avoid considering the “economic reality” of the transaction.
• The substance of the transaction is key rather than its form. This reflects “transactional reality” and ensures that “apparent” features of the transaction give way to “real” features. The purpose and genuineness of each step must be considered.
• The nature of the transactions may be important (eg the fact that charges and land purchases are “indissolubly bound together”).
• The number of parties providing funds should be considered.

Applying the above principles, the Judge refused to treat the international inter-bank transactions as forming a single scheme or transaction. In reaching this decision, the Judge found it relevant that the transfers involved “the adjustment of balances” between two pairs of banks: SABB and Citibank; and Citibank and NatWest. The interbank accounts are settled in the normal course of business by a running account and “it is usually unnecessary for either bank to transfer funds to the other”.

In relation to the fourth way (considering whether TAL could trace an interest into the property), the Judge applied the principle that tracing through mixed funds (including those created by international banking transfers) was impermissible at common law⁵. On this basis, any enrichment would not have been "at the expense" of TAL. 

Was the enrichment unjust?

The Judge found that a claimant may sometimes be denied relief on the basis of unjust enrichment if i) the claimant responded unreasonably to their doubts, and so unreasonably ran the risk of error, ii) if they had doubts, they may be denied relief on the distinct grounds that they compromised or settled with the defendant, or iii) on the basis that they are estopped from pleading their mistake. The Judge found that there was no need for any independent “assumption of risk” bar, as had been suggested by NatWest. That being the case, and after considering the facts, the Judge found in favour of TAL that any enrichment was unjust on the basis that employees at TAL were "completely taken in by the fraud" and at every stage believed that they were acting on a true instruction.

Is there any specific defence available to the defendant (such as 'change of position' or 'ministerial receipt')?

In relation to the defence of 'change of position', the Judge held that the relevant question was whether it was 'unjust' to permit NatWest to rely on the defence. Following an examination of the bank's internal systems, the judge held that nothing in the design or operation of NatWest's AML or anti-fraud systems would make it unjust to allow NatWest to rely on the change of position defence. While it could be said that an employee was careless, or did not handle one of the automatic anti-fraud alerts in accordance with internal guidance, this was not enough to justify the conclusion that NatWest should be precluded from relying on the change of position defence and nothing in the employee's conduct raised any question of unconscionability. Finally, the Judge held that, once NatWest knew of the fraud, the process of freezing the Account was not handled 'efficiently'. However, he stated that lack of efficiency was not a sufficient reason to preclude reliance on the defence and noted that it was important to bear in mind that the payment out of the Account was essentially an automated process (the final transfer out was not actively authorised by NatWest, but was “permitted” by NatWest's automated processes). 

On the basis of  the decisions outlined above, the Judge did not consider the availability of the defence of ministerial receipt. 

It is understood that TAL did not seek permission to appeal. 

Comment 

Recent decisions in relation to fraudulent payments have generally involved claims against the defrauded party's own bank.  

However, it is perhaps not surprising that victims of fraud are increasingly looking to the fraudster's own bank for redress. This is particularly the case where the recipient bank has failed to act expeditiously once notified of the fraud or its systems and controls appear not to have met applicable standards and failed to detect the fraud.    

¹  [2022] EWHC 1172 (Comm)
² [2004] 1 All ER (Comm) 193 CA
³  Byers v Samba Financial Group [2021] EWHC 60 (Ch) and Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156
⁴  [2002] UKHL 12, paragraph 12
⁵  Bird J held that the correct approach to tracing is that set out in Agip (Africa) Limited v Jackson [1991] Ch 547