Victims 4 – 1 Banks: Developments in APP Fraud Litigation

In 2023, Authorised Push Payment (APP) fraud reached alarming levels in the UK, prompting a surge in litigation that challenges banks’ responsibilities and offers hope for victims seeking restitution.

What does this mean for banks and victims of APP fraud?

APP fraud, where victims are tricked into authorising payments to fraudsters, resulted in a staggering £459.7 million loss in 2023 alone. Historically, victims rarely recover their funds, even after extensive legal battles. The crux of the current issue is whether recipient banks should bear more responsibility for preventing fraud and assisting in the recovery of stolen funds. This article follows the journey of APP fraud litigation since 2020 where the jurisprudence has developed considerably.

The usual course of action by a solicitor in such cases involves frantic telephone calls and emails to the recipient bank seeking an immediate voluntary suspension, followed by obtaining worldwide freezing orders and ancillary disclosure orders against the recipient bank only to find the stolen funds have long since gone. However, a common feature in our experience of the disclosure provided by the banks was the scant and often suspicious KYC documents that had been used to open the bank accounts to which the proceeds of the APP fraud were received. It was therefore unsurprising that the jurisprudence has moved in the direction of claims against the recipient bank.

2020: Victims 1 – 0 Banks

In the widely reported case of IFT SAL Offshore v Barclays Bank plc [2020] EWHC 3125 (Comm), Barclays opened an account for a Polish national for his newly established sole trader painting business, trading from a residential address at a North London flat with an annual turnover of £60,000. Less than a month later, US$ 249,696.44 was paid into the account and immediately out to Dubai. The funds had arisen from an APP fraud. Barclays had taken no action to prevent the transfer through the account of these suspicious payments.

Despite resistance from Barclays, the Court granted IFT permission to use information obtained pursuant to a Norwich Pharmacal Order against Barclays. The judge did not accept, as Barclays contended, that allowing the claimant to use the documents could set a precedent that might encourage speculative claims against banks by victims of fraud. Interestingly, this case never came to trial, suggesting an out of court settlement.

Whilst this appeared to be a success of the victim, in our experience the unintended and unfortunate consequence of this was that many banks then refused to disclose KYC documents at all under NPO application for fear they were in fact truly trojan horse attacks by the victim who would rely on the inadequate KYC documents to pursue claims against the banks.

2022: Victims 1 – 1 Banks

Whilst we never saw the end of IFT, the banks evened the score two years later in Tecnimont Arabia Limited v National Westminster Bank plc [2022] EWHC 1172 (Comm) (“Tecnimont”).

In Tecnimont, the victim company was fraudulently induced into transferring USD$5,00,0000 to a NatWest account operated by the fraudster. The company commenced proceedings against NatWest on two grounds, namely (i) unjustly enriched and (ii) NatWest had knowingly received property subject to a trust. HHJ Bird (sitting as a judge of the High Court) rejected both grounds and granted NatWest’s application for summary judgment. Although critiqued by many commentators, this decision was not appealed and stood as the lone authority until this year.

The decision In Tecnimont was good news for banks, as it effectively deterred any victims of APP fraud bringing tortious claims of unjust enrichment or equitable claims which required trust property to be established. However, only two years later, victims of a scored a hat-trick in quick succession…

2024: Victims 4 – 1 Banks

A trio of recent High Court cases have now cast significant doubt over the precedential value of the decision in Tecnimont and, perhaps, re-opened the door for victims of APP fraud bringing claims against recipient banks.

  1. Terna Energy Trading DOO v Revolut Ltd [2024] EWHC 1419 (Comm)

This case marks a significant shift in favour of the victim. The court denied the bank’s summary judgment request, suggesting that banks can indeed be enriched at the expense of fraud victims, thereby opening the door for unjust enrichment claims. This ruling indicates that complex modern banking mechanisms, which do not involve direct transfers of funds, do not absolve banks from liability.

  1. Larsson v Revolut Ltd [2024] EWHC 1287 (Ch)

Here, the court allowed a claim of dishonest assistance to proceed despite the bank’s argument that no trust existed over the transferred funds. This decision underscores that when funds are fraudulently obtained, they may be subject to constructive trusts, and banks could be liable for dishonest assistance if they fail to act against fraud.

  1. CCP Graduate School Ltd v National Westminster Bank Plc [2024] EWHC 581 (KB)

This case suggests that banks might owe a duty to take reasonable steps to recover funds lost to fraud. The ruling hints at a developing area of law whereby banks could be held accountable for not adequately responding to fraud alerts, potentially leading to broader responsibilities for victim restitution.

APP Fraud: Analysis and Implications

These cases signify a potential paradigm shift in how APP fraud is litigated and how liability is distributed. Whilst these cases are yet to reach trial, if courts continue this trend, banks will need to enhance their fraud prevention measures and be more proactive in recovering lost funds. This change could lead to increased costs for banks, which might be passed on to consumers, but it would also offer victims a better chance of recovery.

As legal professionals, we see these developments as a necessary evolution. Banks, benefiting from the trust of their customers, should share the burden of protecting against and responding to fraud. While this may increase operational costs for banks, it aligns with broader consumer protection principles and could drive innovation in fraud detection and prevention technologies.

The shifting legal landscape in APP fraud litigation highlights a growing recognition of banks’ potential liabilities. These recent cases offer a glimmer of hope for victims and suggest a future where banks may play a more active role in combating and mitigating the effects of fraud. This evolution is not just a legal necessity but a step towards a fairer banking system where trust is protected, and victims are better supported.

Ashley Fairbrother & Oliver Fredrickson – July 2024.