Privy Council decision goes to the heart of what financial institutions should know about the commercial rationale behind transactions and the source of customers’ funds.
This case provides important guidance as to the circumstances in which a financial institution may be held to have had notice of impropriety based on its failure to ask proper questions about a financial transaction.
The central question was whether Crédit Agricole (“the Bank”) had constructive notice of a pre-existing proprietary right to funds which had been used to repay a loan facility.
This would mean that the Bank would be unable to defeat a tracing claim brought against those funds by virtue of being a bona fide purchaser for value without notice.
In order to determine whether the Bank had notice, the Board was required to consider whether its knowledge of the transaction through which it received the funds was such that it should have made further inquiries, and whether such inquiries would have revealed impropriety, which would in turn have alerted the bank to the existence of an earlier proprietary right.
While each case is decided on its facts, this judgment will be of particular interest to financial services businesses concerning their level of understanding of the source of a customer’s funds and the commercial rationale behind structures used in transactions involving those funds.
The decision shines a spotlight on what are sometimes perceived as the more difficult areas to interpret in the Jersey Financial Services Commission’s AML/CFT Handbook and provides guidance as to what constitutes understanding the ‘commercial rationale’ of a structure and related transactions.
It should give banks and other financial services businesses pause for thought when considering client acceptance procedures, documentation and ongoing monitoring.
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