Last month the UK Privy Council delivered an important decision on the extent to which a bank is obliged to make inquiries into the underlying commercial purpose of offshore financial arrangements.
A copy of the decision in Crédit Agricole Corporation and Investment Bank (Appellant) v Papadimitriou (Respondent) (Gibraltar) is here.
The appeal concerned a proprietary claim to proceeds of sale from a valuable art-deco furniture collection. Such claims often enable recovery of derived property from a receiving party with constructive notice of underlying impropriety. It’s often the only means of recovering property in circumstances where the wrongful transferor has become insolvent and the receiving party has not been dishonest.
A valuable art deco furniture collection was fraudulently sold by a partner of a family member who had been in possession of it at the time of his death (but who was not the owner). The structure used to effect the transfer of the proceeds of sale shines a light on the use of offshore jurisdictions to achieve improper purposes. The US proceeds of sale were paid to two Panamanian companies, then paid into the bank through a Liechtenstein Foundation owned by the fraudster, then deposited in the Gibraltar branch of the Bank into an account belonging to a BVI company for the purpose of providing a guarantee for the fraudster’s London facility.
The Privy Council accepted the lower court’s conclusion that the use of a web of legal entities and its attendant cost should have alerted a reasonable bank to the improper motive namely to launder the proceeds of sale. Merely inquiring about the source of the funds rather than the underlying commercial purpose behind the arrangements was insufficient to displace the bank’s constructive notice of impropriety.
Various tests were suggested for establishing constructive notice of impropriety:
The bank must make inquiries if there is a serious possibility of a third party having such a (proprietary) right or, put in another way, if the facts known to the bank would give a reasonable banker in the position of the particular banker serious cause to question the propriety of the transaction….In the present case, on the facts actually known to the bank, there was no apparent explanation of the interposition of the Panamanian and Liechtenstein entities unless it was to conceal the origin of funds derived from third parties. That was why the bank had to make inquiries before proceeding as if there was an innocent explanation.
Although money laundering regimes have been significantly tightened since the main events occurred, the case assumes some extra topicality in the light of the forthcoming central registers of beneficial ownership being introduced by the EU’s fourth Anti-Money Laundering Directive and pre-election calls in the UK for a sanctions regime to be introduced for those offshore jurisdictions that fail to produce a public register of offshore companies.
Alistair Craig, a commercial barrister practicing in London, is a frequent contributor to the FCPA Blog.