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Is my Bank Responsible for a Scam Transaction?

Banks play a large role in maintaining social order and ensuring the economic prosperity of entire populations. Society and the economy are becoming increasingly reliant on technology, automated payment systems and internet banking.  In this environment fraudulent activity and financial scams are rapidly increasing. In Australia over 300,000 scams were reported in the 12 months to December 2023. The law certainly has a role to play in this realm, however, the extent to which banks are legally responsible for fraudulent or scam bank transactions is not a simple subject. This article will explore some of the legal remedies available to victims of bank scams with regard to banks, and analyse the extent of liability, if any, that is imposed on banks. 

Legal Avenues for Recovery of Money Lost to a Bank Scam 

  1. If the perpetrator of the scam or fraudulent transaction can be identified, you may be able to launch a claim against the perpetrator, whether an entity or person; 
  2. If the money can be traced and located, a proprietary claim may be launched against the person or entity that received the money; 
  3. Failing options (1) and (2), scam victims may have a cause of action against their financial institution by way of common law breach of contract, or an equitable breach of duties. 

Call us to arrange a free 20 minute no obligation consultation that includes case evaluation and cost estimate.

In light of the advancements in technology mentioned above, it may be difficult to successfully make out a claim against a scammer personally, as fraudsters are using increasingly sophisticated methods that shield their identities and conceal any money. 

Regulators have long seen the bank’s role as pivotal in combating scams and banks accordingly have a strong incentive to take steps to address the issue.

This therefore brings us to the primary topic of this article; how, and when, is a bank responsible or liable for scams or fraudulent transactions? 

An Overview of the Bank/Customer Relationship 

There are multiple duties that arise when a customer engages the services of a bank or financial institution. In understanding a bank’s responsibility, it is pertinent to outline the nature of the customer-bank relationship:

  1. The relationship is governed by contract, with both express and implied terms;
  2. It is a relationship of creditor and debtor. When a customer deposits their money in the bank, the money becomes the property of the bank, and the customer becomes a creditor, with the amount payable upon request.  A bank’s primary duty to a customer is to transfer funds promptly as instructed by the customer. 

An Overview of the Law regarding Bank Scams

Banks are not responsible for identifying and preventing every scam and fraudulent transaction. The legal authority on this topic in Australia is still developing, however, there are applicable laws originating in the United Kingdom that support the obligation of banks to prevent scams. Until recently, the leading common law authority regarding a bank’s duties where a fraudulent transaction has occurred was the UK case of Barclays Bank plc v Quincecare Ltd (1992) 4 All ER 363. This resulted in the concept of  Quincecare duty.  Put simply, a bank owes a general duty to act with reasonable skill and care when processing customer requests. The duty is limited, and only applies to interpreting, ascertaining, and acting in accordance with the instructions of the customer. The facts of this case involved an authorised signatory of a company requesting, dishonestly, to transfer funds for their own benefit. Hence, the relevant relationship here was that between the bank and a third party or agent. 

Quincecare, albeit still applicable to the customer and bank relationship today, outgrew its infallibility due to the evolving nature of modern-day scams. A large percentage of fraud comes by way of Authorised Push Payment (APP) scams, where individuals are deceived into sending money under false pretences. In July 2023, the UK Supreme Court passed judgement in a case which considered the application of the Quincecare duty in a modern APP scam scenario; Philipp v Barclays Bank UK plc (2023) UKSC 25. 

The legal case of Phillip v Barclays Bank confirmed the following: 

  • the implied duty to act with reasonable skill and care, the so called  Quincecare duty, stands, and applies equally to individual and corporate customers;
  • the Quincecare duty maintains it’s narrow scope – interpreting, ascertaining and acting in accordance with the instructions of a customer;
  • that the Quincecare duty is in itself not a real duty, but is in fact just an application of the duty of reasonable skill and care that arises in contract;
  • there will never be a conflict between the bank’s duty to execute a valid payment instruction and the bank’s duty of reasonable skill and care because the duty will only be engaged where there are questions about the validity of the instruction.

In summary, Phillip v Barclays Bank strongly suggests that banks will not have breached their duty of reasonable skill and care in an APP scam scenario, as these involve a valid payment instruction from the client. The case ruled that where a bank has been “put on inquiry”, to uphold their duty of reasonable skill and care, the bank must ensure that any instructions are made with the actual authority of the customer.

If a scam has been committed in circumstances where the customer has not authorised a payment, the bank may be in breach of its duty to act with reasonable care and skill.

Determining if a Bank has Breached the Contract

In Phillip, the Court endorsed the duty accepted in Ryan v Bank of New South Wales (1978) VR 555 at 107. In this case, it was accepted that a bank should not comply with the customer’s instruction “if a reasonable banker properly applying his mind to the situation would know that the customer would not desire their orders to be carried out if they were aware of the circumstances known to the bank.” An example of this is where a bank account has been flagged as suspicious, either by way of ASIC notifications, previous complaints or similar and if a bank, with this knowledge, continues to execute a payment, it may be in breach of its duties and be held liable. 

The redefining of the Quincecare duty and how it relates to bank mandates means that customers who have been defrauded would not need to put on evidence that reasonable inquiries by their bank would have led to a different outcome. All they would need to show is that the bank was on notice of some form of suspicious activity.

Whilst not explicitly stated, the Court in Phillip has left the door open for claims against banks who, once notified that a fraudulent transaction had occurred, failed to promptly act on that information to cancel cards, prevent further transactions, or potentially recover the funds. For example, if a customer calls a bank to report a security breach but is on hold for a long time, and a fraudulent transaction occurs whilst on hold, the bank may be liable for this transaction, due to the bank’s lack of promptness. 

Key Takeaways 

  • The law in Australia is not significantly developed, however we take direction from United Kingdom cases such as Quincecare and Phillip.  
  • There are limited scenarios in which a bank is responsible for fraudulent transactions.
  • If a bank has been “put on notice” for some form of suspicious activity, yet the bank continues to facilitate a scam by processing a payment, they may be in breach of the bank’s duty to act with reasonable skill and care. This duty arises in the contract between a customer and the bank as found in the legal case of Ryan v Bank of New South Wales (1978).
  • If a bank does not act promptly upon reports of suspicious activity by a customer, the bank may be in breach of the bank’s duty to act with reasonable skill and care. 
  • APP scams are more difficult to hold the bank responsible for, as these involve an express request from the client, albeit under false pretences. 

How can BSM Lawyers Assist?

BSM Lawyers highly recommend seeking professional legal advice if you have been subject to a financial scam or have incurred monetary loss due to fraudulent transactions. Brander Smith McKnight’s team of expert fraud and internet scam lawyers are here to ensure you are aware of all your options and to aid you in any potential remedies.  

Call us to arrange a free 20 minute no obligation consultation that includes case evaluation and cost estimate.

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