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Company account opened without authority – fraud by signatories – bank failed to identify customer properly – contributory fault
Mr A was the sole director and one of three shareholders of a company. In 2004 the company set up a bank account, transactions for which required the signatures of the other two shareholders, Mr B and Ms C. Mr B and an employee of the company, Ms X, opened the account, using a false undated and unstamped certificate to pass themselves off as directors of the company, and fraudulently included Ms X as an authorised signatory. The bank officer who opened the account for the company did not ask for or examine any other evidence that Mr B and Ms X were acting with the authority of the company.
In early 2005 Mr A sensed that something was wrong, and became worried about the account. It was closed in August of that year, with a trace of company transactions revealing that 25 cheques had been signed by Ms X. Mr A estimated that a significant proportion of company funds had been misdirected into accounts of individuals who were never owed money by the company.
In September 2005 Mr A complained formally to the bank about the unauthorised transfers. The bank’s account operating instructions required at least one director of a company to authorise signatories to its account. Mr A – at that time known to the bank as the sole director of the company – had not been contacted by the bank when Ms X was added as a signatory.
Mr A came to me with his complaint in October 2005. He complained that the bank did not meet acceptable standards when it relied on the false document to grant access to the account. He said that, when the bank performed credit checks on the company, they clearly revealed that there was only one director, and that the signatories were not directors, as they claimed to be. The bank had relied on the false document, effectively providing a cover under which the fraudulent activities could take place.
Mr A claimed that he had suffered a direct loss of $28,062 and further consequential losses due to some debts not paid by the company. Additionally, the financial pressure had caused him stress and anxiety.
The bank said that there was no reason to doubt the validity of the certificate presented by Mr B and Ms X. It was not in the practice of collecting or sighting collateral evidence such as company constitutions, and had acted in good faith. It declined to take responsibility for the actions of Mr B and Ms X on the grounds that this was an internal matter for the company to deal with. The bank stated that Mr A should have been more vigilant about the company’s funds. On one occasion Mr A had accepted a personal cheque from the company account with Ms X’s signature on it. On top of that, he had not bothered to look at the account statements.
When examining the documents required by the bank to open the account, I noted that none of the forms associated with its account operating instructions had been completed wholly in accordance with the bank’s requirements. Taken individually, perhaps none of these shortcomings was significant. However, in combination they suggested that the account opening process was severely compromised. Effectively, identification safeguards designed to protect customers and to prevent the possible misuse of banking systems had been bypassed.
The bank had failed to obtain any evidence that the company was genuine or any corporate authority for the opening of the account. These factors compounded the errors made at the form-filling stage, and made it more possible for fraudulent operations to take place on the account.
I found that the bank’s procedures on this occasion did not conform to good banking practice, and were also below the standard expected by the bank itself. There is a basic obligation on a bank to protect a customer’s property. It cannot be the customer’s responsibility to judge whether front line staff are sufficiently knowledgeable or experienced to open a company account.
I did agree with the bank that Mr A should have been more attentive to the account’s activities. It should have been obvious to him on several occasions that an unauthorised person was co-signing company cheques, as he had seen some of these cheques himself. Mr A became suspicious in early 2005, yet did not investigate matters until September of that year.
Mr A accepted that many of the fraudulent cheques were most probably paid in return for services to the company, but disputed seven cheques. One cheque was paid to Mr B, and it was impossible to determine whether or not this amount was owed to him as a shareholder. I accepted that the other six cheques were paid to people who had not provided any benefit to the company.
I found that Mr A should be entirely reimbursed for one cheque, as he could not have been expected to have been aware of any unauthorised dealings at that time. I considered that Mr A had contributed to the loss arising from the other five cheques, as he should have been more vigilant about the account’s activities. Accordingly, I concluded that the bank should reimburse 50% of the total amount of these five disputed cheques.
Mr A had suffered considerable stress and anxiety when funds were unavailable. He had also been required to devote considerable time to researching the events. I therefore proposed payment of $2,000 compensation for inconvenience, amounting to total compensation of $12,712. Both the bank and Mr A accepted my proposal.