Law Firm Mikov & Attorneys completed successfully the two and a half years long litigation against Eurobank Bulgaria regarding damages to our client 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 case developed through all possible three court instances in Bulgaria. Last month the Supreme Court of Cassation after deliberations in closed chambers did not admit the bank’s cassation appeal thus sustaining in full the first and second instances’ decisions. As a result, the bank paid to our client the full amount of the awarded compensation for damages, the statutory interest accrued thereon from the claim’s submission and the court expenses and legal fees for all three court instances.
What Happened So Far
More than five years ago our client became a victim of a sophisticated ongoing criminal fraud scheme involving an unknown number of organised participants from different countries. Through false emails the fraudsters succeeded in deceiving the victim to transfer significant amounts of money to the fraudster’s bank account in the Bulgarian bank. Despite the timely recall due to fraud, the payee’s bank did not block in time the funds or return them to our client but rather allowed transfers from the scammer’s account to other parties. Thus, we were able to recover only a part of the client’s funds after successful litigation against the fraudsters and although exotic 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.
Both first and appeal instance courts concluded that the bank should have executed its obligations very carefully especially in case of money laundering suspicions 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 treat the transfer of our client with the required extra 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.
Worth noting both court decisions may serve as a manual on the implementation of effective risk-based procedures by financial institutions 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. The judges clearly stated that 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 to consider whether the respective transactions correspond to the risk profile of the client and the information collected during the KYC process. In particular, 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 such obligations its 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. In addition, the bank did not collect additional information on the verification of the name and the IBAN 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.
Supreme Court Ruling Highlights
Pursuant to law the admission of a cassation appeal presupposes that the appellate court has ruled on a substantive and/or procedural issue with the appealed decision, which determined its legal conclusions on the subject matter of the dispute (the general prerequisite), and that some of the additional special statutory prerequisites have been fulfilled in relation to this issue. The substantive or procedural issue must be of importance for the outcome of the specific case, for forming the decisive will of the court, but not for the correctness of the appealed decision, for the perception of the factual situation by the appellate court or for discussing the evidence collected in the case. The bank raised a total of twelve issues as grounds for cassation appeal, all of them being unfounded for admission of the appeal due to the absence of the general prerequisite as per the reasoning of the supreme judges:
The first two issues referred to the lack of an explicit mandatory provision allowing a bank to refuse the execution of a payment order. The bank claimed that it had to process the transfer as otherwise it would have violated its obligations as a payment services provider. The supreme judges stated that on one hand, such two issues concerned the correctness of the conclusion that the bank should not have credited the account of its client with the amount ordered by the plaintiff with the disputed transfer, and on the other hand, they were not decisive for the outcome of the dispute. As can be seen from the reasoning of the appealed decision, the final conclusions were not based solely on the actions taken on the transfer date by the bank’s employees to credit the client’s account with the currency transfer ordered by the plaintiff, but also on the established series of inactions by the bank’s employees, carried out in the period before and after, to carry out a comprehensive check of the client, refuse to block the account and allow an outgoing transfer.
Four of the next issues concentrated on the legal significance of the discrepancy between the name of the transfer’s recipient and the IBAN when executing a payment transaction by the payment service provider for transfers within the EU and the requirement for requesting additional information therefor. As per the Supreme Court’s ruling these issues were also related to the conclusion of incorrect crediting of the client’s account with the transferred amount. They also concerned correctness and were not prejudicial to the court’s final conclusions, since the implication that the transaction should have been identified as a higher-risk operation was justified not only because of such discrepancy, but also because the transaction appeared illogical and incompatible with the client’s profile. The same applied to the procedural issue (should the court discuss all the evidence collected in the case together and separately and all the arguments and objections introduced by the parties and should the court decision be issued after their aggregate assessment) as a complaint was raised only about the court’s failure to discuss the arguments and objections related to said discrepancy.
The following two issues addressed the consequences of a comprehensive check under the Law on Payment and Payment Services, namely would the respective results give grounds for the payment service provider to block amounts on its clients’ accounts or to refuse to make outgoing transfers therefrom its clients’ accounts. The supreme judges found that such issues did not correspond to the reasoning of the appellate court. As can be seen from the reasons, the need to conduct a comprehensive check of the bank’s client was commented on in the aspect that the bank’s employees should have assessed the transaction in question as one with a higher risk.
The tenth issues on the causal link between the non-performance and the damage, when the damage was a consequence of the creditor’s behavior, besides being formulated too generally, was found by the supreme judges to be predicated on the false statement that the damage had been a result of the creditor’s actions. Thus, it was also not decisive for the final conclusions. The last two issues were related to the causal link, as an element of the tort liability, between the execution/permission of outgoing bank transfers from the account and the behavior of the bank’s employees, preceding the receipt of the plaintiff’s transfer, and the damages suffered by the plaintiff from the failure to receive the transferred amount. Such issues were dismissed as either not corresponding to the data in the case or expressing disagreement with the correctness of the appealed decision, which could not be discussed in the admissibility proceedings.
Finally, the cassation applicant did not justify the scope of the alleged obvious irregularity, since the arguments for an admitted violation of fundamental procedural rights and imperative legal norms for the judicial proceedings were entirely perfunctory.
Implications
The outcome of the case provides a brighter perspective to all consumers of payment services executing numerous transactions on daily basis that the banks and other payment services providers will be more diligent and observing the applicable laws. Otherwise, they will pay compensations for the caused damages.
