Banking Law

• Publication year: 2019
• Date: 01 December 2019
• Citation: (2019) 20 SAL Ann Rev 96
• Author: Dora NEO MA (Oxford), LLM (Harvard); Barrister (Gray's Inn), Advocate and Solicitor (Singapore); Associate Professor and Director, Centre for Banking & Finance Law, Faculty of Law, National University of Singapore.
• Published date: 01 December 2019

I. Bank payments

A. Sending bank's implied promise to reimburse beneficiary's bank in an international funds transfer

5.1 When a customer (“sender”) instructs its bank (“sending bank”) to transfer funds electronically to a recipient (“beneficiary”) in another country, the sending bank will usually contact the beneficiary's bank to ask it to pay the beneficiary. In return, the sending bank will pay the beneficiary's bank, and claim payment from its customer, the sender. This is typically done through a chain of correspondent banking relationships, facilitated by messages sent through the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) system. The contract between the sending bank and the recipient's bank in an international funds transfer was examined in Malayan Banking Bhd v Barclays Bank plc (“Maybank v Barclays”),1 a decision of Jeremy Cooke IJ in the Singapore International Commercial Court. There, the defendant bank (“Barclays”) sent a SWIFT “MT 103 STP” to the claimant bank (“Maybank”), asking Maybank to transfer US$871,080.61 to the account of PLG International Pte Ltd (“PLG”), one of Maybank's customers in Singapore. At around the same time, Barclays also sent a SWIFT “MT 202 COV” message to its correspondent bank in New York, US, to transmit funds to Maybank's correspondent bank in New York to “cover” the MT 103 STP. The next step in this transaction would have been for Maybank's correspondent bank in New York to send the funds to Maybank in Singapore to reimburse it for crediting the beneficiary's account. However, Barclays later sought to cancel both the MT 103 STP and the MT 202 COV as it had information that the funds to be transferred had been received by its customer in questionable circumstances, and was concerned that a fraud may have been committed. Barclays' correspondent bank in New York cancelled the MT 202 COV as requested, but Maybank in Singapore had already credited the relevant amount to PLG's account. Maybank sought PLG's consent to reverse the credit that had been made, but PLG refused,

as they claimed that the payment had been for a genuine business transaction. Barclays refused to reimburse Maybank for the payment made to PLG, and Maybank brought an action claiming that there was an implied contract between Barclays and Maybank under which Barclays was bound to reimburse Maybank the funds in relation to the MT 103 STP.

(1) Implied contract

5.2 The court found that there was an implied contract between Barclays and Maybank that Barclays would reimburse Maybank for payment to PLG. It applied the law relating to implied contracts set out by the Court of Appeal in Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, Singapore Branch v Motorola Electronics Pte Ltd,2 where it was observed that in an implied contract, the consent of the parties could be manifested by communications between the parties and by conduct.3 The court in Maybank v Barclays was of the view that the contract “had to necessarily be implied from the sending of the MT 103 STP and the acceptance of the unconditional instruction within it, when making the payment”.4 With respect, this is clearly right. As the court explained: “The bank of one party seeking to pay another party does not give instructions to another bank to pay that party without being obliged to reimburse the latter for the payment in question, if it is made.”5 The instruction to pay contained in the MT 103 STP could be withdrawn before it was acted upon by Maybank, but it could not be revoked once payment had been made in accordance with the instruction given. In its defence, Barclays argued that Maybank had acted in a manner inconsistent with market practice by making the credit transfer to PLG's account without having first received a cover payment from its correspondent bank in the US, and that this was an internal credit risk decision which Maybank took, for which it should bear the consequences. The court followed the approach taken by Colman J in the English case of Tayeb v HSBC Bank plc6 (“Tayeb”) that there must be clear and cogent evidence to meet the stringent test applied to implying a term by reason of market custom or usage. After considering the evidence, the court in Maybank v Barclays concluded:7

[I]t is clear that Barclays cannot discharge the burden of proof of showing that there was an established banking practice which constitutes a usage or custom that was notorious, certain and reasonable that Receiving Banks do not to pay on MT 103 STPs until a cover payment is received, let alone a usage of lack of entitlement to be reimbursed when payment is made before receipt of the cover payment. There is nothing which could impact on the implied contract which necessarily exists when one bank instructs another to make a payment on its behalf. To the contrary, the evidence shows that such payments have continued to be made and of necessity, have to be made in some circumstances, if same day value is to be given.

On the facts of the case, there would be a time lag of around 12 hours between an MT 103 STP instruction being received in Singapore and an MT 202 COV being acted on in New York. The only way that same day value could be assured in these circumstances would have been for Maybank to act on the MT 103 STP without waiting for confirmation of the cover payment.8

(2) Illegality and industry practice

5.3 Barclays further argued that if it had proceeded to transfer the funds to Maybank in relation to the MT 103 STP, it might have breached para 5.5 of the SWIFT General Terms and Conditions, which provided, inter alia, that, “[in] using SWIFT services and products and in conducting its business, the customer … must comply with good industry practice and all relevant laws” and that the customer must “ensure not to use … SWIFT services and products for illegal, illicit or fraudulent purposes”.9 Barclays maintained that if it had not cancelled the MT 202 COV and the MT 103 STP, it ran the risk of committing a money laundering offence under s 327 of the UK Proceeds of Crime Act10 (“POCA”), and breaches of various regulatory provisions enforced by the UK Financial Conduct Authority (“FCA”). The court was of the view that an offence under s 327 of the POCA would only be committed if the property transferred was truly “criminal property”, meaning that it must constitute a person's benefit from criminal conduct or represent such a benefit.11 On the facts, it was not shown that the funds were fraudulently obtained.12 Indeed, Barclays did not argue that making the payment required by the MT 103 STP would have made it liable to an offence. It argued that there was a risk of such liability, based on the information available to the bank at the relevant time, that no responsible bank would have paid out in

those circumstances, and that it would have been reckless for Barclays to have ignored the risk and done so.13 The court referred to its finding that Barclays had made a contractual commitment to reimburse Maybank for the sums paid out by it pursuant to Barclays' instructions, and stated that Barclays was bound to make this payment unless the defence of illegality applied. The court found that Barclays could have reimbursed Maybank by at least two other means which did not involve using the suspicious funds. One would have been to use other funds belonging to its customer (assuming these were sufficient) to reimburse Maybank. Another would have been to use its own funds first and later recoup the expenditure from its customer if the suspicions of fraud were allayed, or if fraud was proven, to bear the loss of its customer's fraud, rather than to pass this loss to Maybank.14 The court was of the view that if Barclays had taken either of these courses of actions whilst making appropriate disclosures to the authorities of suspected fraud or money laundering in accordance with the obligations imposed in other sections of the POCA, it would not have run any risk of liability under the POCA or the money laundering regulations.

5.4 The relevant FCA regulations set out the requirement “to establish and maintain policies, controls and procedures to mitigate and manage effectively the risks of money laundering and terrorist financing”15 and:16

… to ensure the establishment of policies and procedures which include systems and controls that enable the entity concerned to identify, assess, monitor and manage money laundering risk and are comprehensive and proportionate to the nature, scale and complexity of its activities.

Further, the FCA's Principles for Businesses require that “an entity conduct its business with integrity and take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”.17 The court found that there was no evidence that Barclays had failed to maintain such policies and procedures.18 The only danger of falling foul of these regulations may have arisen from Barclays paying Maybank, but even this would not have been an issue if Barclays had avoided debiting its customer's account of the questionable sums

and had instead used either of the two alternatives, as suggested by the court,19 above to reimburse Maybank.

(3) Lessons for financial institutions

5.5 In addition to the helpful general analysis on how to find an implied contract, two important lessons that are especially relevant to the banking industry can be drawn from the decision in Maybank v Barclays. First, the decision reiterates the point that the contract between a bank and its customer is independent from its contract with its correspondent bank. Each contract has to be fulfilled according to its own terms. This can be illustrated by examining the two pairs of banking relationships, between Barclays and Maybank and between each of them and their respective customers, namely, the sender and the beneficiary of the funds transfer. For instance, when the funds were credited...