We are pleased to share and congratulate Konstantin Mikov and Maria Hristova of our member firm Mikov & Attorneys great victory in asset recovery showing that it is possible for the victim of a scam to recover its losses from the bank managing the bank account of the shell company of the scammer !
Tort Liability of Banks? Mission Possible!
At the beginning of 2024 Law Firm Mikov & Attorneys shared the successful first instance litigation against a Bulgarian bank regarding damages due to non- compliance with EU and national law on funds transfers requirements, money laundering and payment services. Given its significance as a precedent and as expected, the bank appealed the decision before the second instance court. After an open hearing and deliberations in closed chambers, the panel of three appeal judges sustained in full the first instance decision confirming that the Bulgarian based bank should pay to our client a total amount of approximately BGN 330 000 compensation and court expenses for both court instances.
Recap of Asset Recovery Case
Right at the start of COVID- 19 pandemic our client, the North American subsidiary of a multinational industrial and technology group, became a victim of a sophisticated ongoing criminal fraud scheme involving an unknown number of organised participants from different countries. The fraudsters succeeded in deceiving the victim to transfer significant amounts of money to the fraudster’s bank account in the Bulgarian bank. In just a few days, our client understood about the scam and requested from its bank to cancel the transfer. Despite the rapid reaction, the payee’s bank did not block in time the funds or return them to our client. Instead, the payee’s bank allowed significant amounts of money to be transferred from the scammer’s account to third parties. Thus, we were able to recover only a part of the client’s funds after successful litigation against the fraudsters and pursued the tort liability of the bank requesting remedy of the damages it wrongfully caused to our client, namely the difference between the transferred and the recovered amounts.
The first instance Court Judge concluded that the bank should have executed its obligations very carefully especially in case of a suspicion of money laundering and/ or terrorist financing as the present case, and as it had not, it should be liable for nonfulfillment of the respective Bulgarian and European laws. Should the payee’s bank treated the transfer of our client with the required attention considering the signs for fraud and imposed AML measures, it should have undertaken the respective actions and prevent the damages to our client. Due to the causal connection between the wrongful actions of the bank and the damages, the bank should pay the awarded compensation to the client.
Appeal Court Decision Highlights
Sofia Appeal Court confirmed the conclusions of the judge and added own reasoning especially on the implementation of effective risk-based procedures by the bank when determining whether to execute, reject or suspend a transfer of funds in case of a suspicion of fraud, money laundering and/ or terrorist financing, namely:
- As a financial institution the bank is a subject to all national and EU AML rules and obligations, among which customer due diligence and risk evaluation;
- In each case of suspicion on money laundering and/ or funds with criminal origin regardless of the amount of the transaction a customer due diligence should be performed in addition to the current monitoring over the business relations with the client and whether the respective transactions correspond to the risk profile of the client and the information collected during the KYC process;
- More than one reasons should have triggered the enhanced due diligence process long prior to the transfer of our client: a notice for annulment of a preceding transfer due to fraud, freezing of the account by the competent AML authorities and the court, numerous smaller transfers to one Asian company for a couple of days without grounds up to a total amount significantly over the agreed terms and conditions (being also grounds for termination of the contract by the bank), huge discrepancies between the declared origin of funds and actual incoming transfers, etc.;
- Should the bank have complied with its obligations the client should have been qualified as a higher risk client with the respective consequences, including termination of the contract prior to the transfer of our client) but the bank failed to do so;
- The transfer of our client should have been qualified as an unusual transaction with higher risk as being illogical and not compliant with the client’s profile, especially given the discrepancy between the real beneficiary of the transfer and the holder of the account with the respective IBAN;
- The bank did not collect additional information on the verification of the name and the IBAN in order to consider whether to proceed, reject or suspend the transfer of funds even though the bank employees had personal impressions of the suspicious behaviour of its client’s manager;
- The bank did not effectively blocked the accounts of the fraudster even after receiving the notice for annulment of our client’s transfer due to fraud. Instead the bank allowed an outgoing transfer that lead to decreasing the available funds and ultimately to the damages of our client.
What’s Next
The bank immediately appealed the second instance court decision before the highest court – the Supreme Court of Cassation although the statutory appeal term is one month after official serving. The haste can be explained to a certain extent because the decision is executable and our client may proceed with freezing the assets of the bank up to the awarded amount. Thus, in addition to the cassation appeal the bank requested from the Supreme Court of Cassation the suspension of execution and achieved it after deposting the awarded amount at the special account of the court as a guarantee until the final decision on the case.
The Supreme Court of Cassation shall first consider the admissibility of the appeal and proceed with the merits only if the second instance court decision is considered to be:
- decided in contradiction with the mandatory practice of the Supreme Court of Cassation and the Supreme Court in interpretative decisions and rulings, as well as in contradiction with the practice of the Supreme Court of Cassation; or
- decided in contradiction with acts of the Constitutional Court of the Republic of Bulgaria or the Court of the European Union; or
- important for the correct application of the law, as well as for the development of the law; or
- in case of probable nullity or inadmissibility, as well as in case of obvious irregularity.
We may expect further development on the case within the next six to twelve months. Watch this space!
