Recent Hong Kong Court Ruling on Bank Liability for Employee Fraudulent Behavior | Bryan Cave Leighton Paisner
What happens when a customer of a Bank loses money due to fraud perpetrated by a Bank employee? If applicable, what remedies does the defrauded customer have against the Bank?
Hong Kong Magistrates’ Court Luk Wing Yan v CMB Wing Lung Bank Ltd (formerly Wing Lung Bank Ltd)  HKCFI 279 considered these issues.
The applicant (the “Applicant“) Has been the victim of fraud perpetrated by the security officer (the”Employee“) From the defendant bank (the”Bank”).
The employee led the plaintiff to believe that his money was being invested in “internal” investment opportunities which the Bank made available only to Bank employees, opportunities which would result in extremely attractive returns (around 100%). times the amount that banks pay on deposits). These internal investments did not exist. Between 2010 and 2013, the claimant transferred a net amount of HK $ 23.8 million from the claimant’s bank account to the employee’s bank account. The applicant’s and employee’s accounts were held at the Bank.
The plaintiff was not the only victim of the employee’s fraud scheme. After the fraud was discovered, the employee pleaded guilty and was found guilty on three counts of fraud. She was sentenced to nine years and four months in prison.
The plaintiff sought to hold the Bank responsible for the losses suffered by the plaintiff as a result of the fraud perpetrated by the employee. The main causes of action by the plaintiff against the Bank were (1) vicarious liability for employee fraud and (2) the Bank’s negligence in processing transfers of funds from the plaintiff’s account to the bank. employee account.
The Hong Kong Magistrates’ Court dismissed the plaintiff’s claims.
The doctrine of vicarious liability, according to which employers in certain circumstances are held liable for the crimes committed by their employees, was developed with the aim of providing victims of civil liability with a remedy against those who have the means to satisfy the just being to lay down the responsibility to do so.
The well-established test of vicarious liability is the “close connection” test (if the employee’s tort was so closely related to his job that it would be just and equitable to hold his employer liable for his act. ‘others). However, given the infinite range of circumstances in which the question arises, there is an inevitable lack of precision in the “close connection” test. The Court must render an evaluative judgment in each case, taking into account all the circumstances and the assistance provided by previous judicial decisions.
The Court in Luk Wing Yan was of the opinion that, in cases of fraudulent misrepresentation (such as the present case), the apparent authority test should be adopted. The employer will be liable if the employee’s fraudulent misconduct falls within the employee’s authority, real or apparent.
In general terms, apparent authority will exist when: (1) a principal has represented, by word or behavior, to a third party that the agent has the power to enter into the type of transactions in question, (2) the third party enters into a transaction based on that representation, and (3) the trust is reasonable. It is commonplace that an agent cannot clothe himself with apparent authority.
In that case, the Court ruled that the employee, as a staff member of the Bank, was authorized to sell securities products to clients. However, the Court said that it was illogical to extend this power to the sale of internal products that were limited to transactions between the Bank and its employees. The Court concluded that there had been no representation or contention on the part of the Bank that the employee had the authority to offer the alleged internal investments to the plaintiff.
Moreover, as admitted by the plaintiff, she was delighted to be offered the investments with extremely high returns, and she did not care why, how or what the logic of the investments was. The Court was therefore of the opinion that, despite obvious suspicions, the Plaintiff was blinded by her greed to engage in participating in the fraudulent investments. The Court concluded that the plaintiff had not actually relied on such apparent authority of the employee and concluded that such reliance by the plaintiff on apparent authority would not have been reasonable.
In the absence of apparent authority, the Court dismissed the plaintiff’s claim against the Bank on the basis of vicarious liability.
Negligence – Quincecare duty
The plaintiff’s allegation of negligence was based on “Quincecare duty ”, which is the duty imposed on a bank to refrain from fulfilling a customer’s order when the bank is warned that the order is an attempted fraud by the customer.
the Quincecare duty comes into play when the bank has received an order or instruction on behalf of its customer (i.e., an authorized agent), rather than directly from its customers. the Qincecare The right only arises in the event of an attempt to embezzle the client’s funds by an agent of the client, i.e. the order or instruction given on behalf of the client is not actually made for the benefit of the client. client or duly authorized by it.
The Court emphasized that the Qincecare Duty does not resonate when the cause of the customer’s loss is his own desire to make payments to his intended recipient. In this case, the payment instructions were made directly by the applicant and, therefore, the Qincecare the assignment was not triggered. The Court held that the Plaintiff was “a victim of her own greed and gullibility” and that her losses were not caused by negligence or breach of duty on the part of the Bank.
The Court refused to expand the scope of Quincecare obligation to detect or investigate transfers that have been authorized by its client and may have been made as a result of fraud.
First the Quincecare The duty is incidental and subordinate to the ordinary primary obligation of the bank to comply with and act on the instructions of the client with respect to the funds in the account. Raise the Qincecare the obligation to an obligation to detect whether an orderly payment is part of a fraud scheme would cast a shadow over the effectiveness of the customer’s instructions and emasculate the bank’s primary obligation. The Court considered that there was no clear framework of rules by reference to which Quincecare duty can function sensibly.
Second, the Court referred to the fact that the Quincecare the duty is a common law duty that rests on the general concept of a bank adhering to standards of honest and reasonable conduct while being aware of the alleged fraud. Accordingly, the benchmark is expressed in fairly general terms with reference to a not too high standard of the ordinary prudent banker.
This judgment will be welcomed by banking and financial institutions for confirmation of the limited scope of the Qincecare duty. However, in the final observation, the Court considered the potential future development of a bank’s bond in an era of increasing sophistication and use of artificial intelligence. The court said that banks could be placed in a position to monitor the functioning of bank accounts held by their employees in their banks, in order to protect its customers from fraud committed by its employees. For this to happen, however, industry-wide consultation and implementation and careful consideration will be required.
Even if this were to happen, employees could still circumvent bank control by defrauding accounts held at banks that are not their employers. The Court emphasized that, at the end of the day, customers should remain vigilant and beware of suspicious banking activity and voice concerns where appropriate. The court reminded bank customers: “if something sounds too good to be true, it probably is.”