Causes of Action against Banks in Internet Fraud
- Stefan Schmierer
- Jan 26, 2021
- 3 min read
Updated: 7 days ago
Authors: Stefan Schmierer, Managing Partner & Anna Lau, Litigation Partner
It is not uncommon for individuals or companies to fall victim to internet fraudsters. The victims are often deceived to deposit money into accounts purportedly belonging to business partners and investment brokers who turn out to be fraudsters. This has become a widespread phenomenon across the globe, with the accrued damage amounting to an estimated 100 billion euros annually.
In most cases where the victims reside in Europe or the US, the accounts involved are located abroad, such as in Hong Kong, China or other Asian countries. As soon as the transfers are credited, these accounts are usually emptied almost immediately before a freezing order can be obtained from a law enforcement agency or a competent authority, resulting in a total and irrecoverable loss.
Considering Third‑Party Liability of Banks
Since the fraudsters and the funds are no longer traceable, victims are often left with no option but to consider recovering their losses from a third party. A key legal question arises as to whether victims may hold beneficiary banks liable for potential breaches of applicable AML (anti‑money laundering) and KYC (know‑your‑client) obligations.
The Quincecare Duty under English and Hong Kong Law
To address this issue, it is necessary to examine the Quincecare duty, which imposes a duty on a bank to refrain from executing a transfer order if it has actual knowledge or reasonable suspicion that the transaction is associated with fraud.
In the 1992 decision where the Quincecare duty first arose, an accountant forged his supervisor’s signature and transferred funds into his own account. Due to the poorly forged signature, the court held that the bank should have detected the irregularity and awarded damages to the company.
High Threshold for Applying the Quincecare Duty
To preserve a bank’s primary obligation to execute customer instructions promptly, the threshold for invoking the Quincecare duty is exceptionally high and applies only in limited circumstances.
Moreover, the duty exists only between the account holder and its own bank, typically the remitting bank. It has not been extended to govern the relationship between the paying party and the beneficiary bank, meaning victims generally cannot rely on it to recover losses from the fraudster’s bank.
Challenges in Proving Bank Liability
Hypothetically, even if the law were extended to permit claims against beneficiary banks, the burden of proof would remain with the victim. Claimants would need to satisfy the court that the bank breached its duty.
This presents a further obstacle, as victims typically have limited access to internal bank procedures, making evidence gathering exceptionally difficult.\
Practical Risk Prevention
Extra caution should always be exercised where investment invitations are involved. Victims are advised to confirm payment instructions by phone, particularly where transfers are directed to foreign accounts or new accounts not previously used.
How Ravenscroft & Schmierer Can Help?
Understanding potential causes of action against banks in internet fraud requires careful assessment of duty, knowledge thresholds and evidentiary limitations. Ravenscroft & Schmierer advises individuals and businesses on recovery strategies following fraud, including assessment of bank liability, regulatory obligations, and civil litigation options.
If you require guidance on your position following an internet fraud incident, contact us to discuss your circumstances and available options.
FAQ: Causes of Action Against Banks Internet Fraud
Can banks be held liable for losses caused by internet fraud?
In limited circumstances, banks may be liable where a legal duty exists and a breach can be established.
What is the Quincecare duty?
It is a duty requiring banks to refrain from executing transactions when there is reasonable suspicion of fraud.
Does the Quincecare duty apply to beneficiary banks?
Currently, the duty applies only between an account holder and its own bank, not the fraudster’s bank.
Why is proving bank liability difficult?
Victims typically lack access to internal compliance processes and must meet a high evidentiary threshold.
How can Ravenscroft & Schmierer advise on fraudulent bank transfers?
Ravenscroft & Schmierer advises on recovery options, bank liability exposure, and civil claims arising from internet fraud.
Does Ravenscroft & Schmierer act in disputes involving AML and KYC obligations?
Yes. We advise on regulatory compliance issues and their relevance in civil recovery claims.
Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
For specific advice about your situation, please contact:
Managing Partner
+852 2388 3899
Partner
+852 2388 3899