While banks might have legitimate concerns about liability for assisting money laundering, they are not entitled to block money transfers unless they are positive that fraud is involved. Suspicions alone are not enough and there were suspicions aplenty for Westpac in a US$49 million deal.
Westpac forced MAP & Associates, a Hamilton firm of chartered accountants, to sue if they wanted to have client funds unfrozen. The accountants were acting as escrow agents, holding some US$49 million as trustee pending sale of a Bolivian bank.
Westpac argued it was entitled to be suspicious. It had been warned of frauds emanating from Bolivia and said it was not clear who were the ultimate recipients of the US$49 million.
The court was told a Panamanian businessman approached MAP Associates in 2006 asking if they would act as escrow agents in a sale of the bank. The bank chairman held a power of attorney stating he had authority to act on behalf of the twenty or so shareholders looking to sell. New Zealand banking facilities were sought to clear the transaction because a Venezuelan purchaser was “not very fond of the USA”.
It was intended that MAP Associates would act as trustee, holding the purchase price paid by the purchaser while due diligence was undertaken. When the purchaser was satisfied, it would authorise MAP Associates to release funds to the vendor. MAP Associates set up a non-interest bearing bank account with Westpac for the short period it expected to be holding the funds in escrow. There was evidence of some US$600,000 payable in fees as part of the transaction.
Funds for the purchase, amounting to some US$49 million arrived in the Westpac account in December 2006 and stayed there for nearly 14 months. When Westpac was instructed to pay out the money in February 2008 it refused.
Westpac said the Financial Transactions Reporting Act required it to be satisfied about the bona fides of the transaction and the identity of the parties. The court was told that Westpac had made inquiries about the Panamanian intermediary negotiating the transaction and was suspicious of his claimed identity. Further it refused to release funds to numbered bank accounts without disclosure of the named owners. When the names were provided, one recipient who was to receive US$11.8 million did not seem to be a shareholder in the Bolivian bank being sold.
Westpac refused to act on instructions delivered by MAP Associates. These instructions had come from overseas in a sealed envelope, held sealed by Westpac until told to open the envelope and pay out the money as the letter instructed.
The Supreme Court ruled that banks are under a strict obligation to carry out client instructions. They can refuse to act if there is fraud or a breach of trust involved. It is not enough that there are mere suspicions of fraud or a breach of trust. Here, Westpac had no proof of actual fraud and was obliged to release the funds as instructed.
Westpac v. MAP Associates – Supreme Court (16.08.11) & Court of Appeal (6.09.10)
11.11.002