A Cautionary Tale for Front Line Bank Employees?
Posted in Banking, Fraud

A common fraud perpetrated on financial institutions is the deposit of counterfeit cheques.  The account holder distances themselves from the fraud by portraying the payment as one they thought was part of a legitimate transaction.  The funds are often withdrawn or transferred before the cheque is returned as counterfeit, usually within a matter of days.  After the transaction is reversed and the customer’s account is well overdrawn, the financial institution is left to try and recover the funds from its customer.  In hindsight, there are often red flags that were overlooked.

One such warning is an urgent inquiry by the customer about whether the funds have cleared or whether the cheque is “good”.  The answer to queries like this can make the difference between recovery by the bank or liability for the loss once the fraud is discovered.

A recent Ontario decision, Oak Incentives Group Inc. v. Toronto Dominion Bank resulted in judgment against the bank for a loss caused when its customer unwittingly accepted a counterfeit deposit into its account.   There are several surprising aspects to this case but at its core the bank was found liable for breach of a duty of care owed to its customer.  That liability arose because of what the bank’s employees knew about the transaction, said and did not say to the customer. 

Oak Incentives was a long term customer buts its account did not have a history of large deposits or transactions.  Oak Incentives was approached by a Mr. Lim who wished to purchase $200,000 worth of Sony televisions.  Mr. Lim was told payment in full had to be received before the product would be shipped.  Mr. Lim said he would wire the funds directly to Oak Incentives’ account.  As a result, Oak Incentives, which did not have familiarity with wire transfers, inquired of the branch manager whether a wire transfer was a safe and secure method of payment.  The branch manager was told about the proposed transaction and, in particular, that the order was a rush delivery requiring confirmation of full payment before the product could be delivered.  The branch manager assured Oak Incentives a wire transfer was safe and secure.

A day or so later, the customer returned to the bank and met with a different employee.  The proposed transaction was explained a second time.  The bank employee was specifically asked whether there had been a wire transfer into Oak Incentives account.  The employee said there had been a deposit but could not tell how the deposit had been made.  Upon being queried about whether the deposit was “100% secure”, the employee said “everything looks fine.  There are no holds on the account”.  As a result of this exchange, Oak Incentives paid Sony $100,000 for the televisions which it then shipped to Mr. Lim.  The televisions were never seen again.  What the bank employee did not say was that the manner of deposit may mean that the funds were not in fact “safe and secure” as they would be with a wire transfer.  She also did not suggest placing a hold of the deposit to ensure it cleared. 

The question for the court was who was responsible for this loss: the bank or the customer?  In the end, the court found the bank negligent for allowing its customer to think the deposit was secure after the customer had made specific inquires on the subject.  Those inquiries put the bank in a “special relationship” with its customer and gave rise to a duty of care.  The bank breached that duty by failing to warn the customer that a deposit other than by wire was not “100% secure”.  The deposit had been made by cheque at an out-of-province branch of the bank.  As a result, the bank had to bear the loss.  Though the case is not good news for banks, happily it is being appealed.

There were other difficulties with the bank’s case (i.e. a delay in telling the customer of the counterfeit cheque, a poor “hold” policy” and a different manner of payment than expected).  The cautionary tale is that when faced with a customer’s query about whether funds deposited into an account are “secure”, great care should be taken to investigate the transaction before providing the customer with any advice.  When and if advice is given to a customer, care should be taken to make sure it is accurate and that the customer is not left with a false sense of comfort that the funds are guaranteed.

Tags: Fraud

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