In a landmark ruling with implications for banking and cyber fraud liability, the Barbados High Court has ordered RBC Royal Bank (Barbados) Limited to repay more than US$615 000 to a corporate customer after failing to halt a sophisticated email fraud scheme.
Delivering a comprehensive judgment in the long-running case of Faith Universal Investments Limited v. RBC Royal Bank (Barbados) Limited and Mithril Investment Advisors SRL, High Court Judge, Justice Barry Carrington ruled that despite broadly worded exemption clauses protecting the bank, RBC breached its common law “Quincecare duty of care” by processing 11 fraudulent wire transfers totalling US$1 142 000 while ignoring a series of red flags.
“This is a somewhat complex matter. The indications are that regardless of the outcome, there will likely be an appeal,” Justice Carrington noted at the outset of his judgment.
The saga began in early 2016 when Faith Universal Investments, a local financial advisory firm, held US and Canadian dollar accounts at RBC’s Chelston Park branch in St Michael. Sandeep Wadhwa, the firm’s beneficial owner, was the sole authorised signatory. To facilitate remote banking, the firm utilised RBC’s email and faxed Payment Instruction Service Agreement (EFPISA), relying on Mithril Investment Advisors, a boutique corporate advisory firm, to transmit banking requests to RBC on Wadhwa’s behalf.
Transfer requests
Between February 9 and March 7, 2016, a fraudster using a bogus Yahoo email address sent transfer requests to Mithril. Mithril, acting as an intermediary, forwarded the instructions to RBC, which processed them. By the time the fraud was discovered, 11 payments had been siphoned to unassociated accounts overseas. While some funds were recovered, US$615 172.79 remained lost.
RBC, represented by Omari Drakes and Kodie Hinds of Clarke Gittens Farmer, heavily relied on the EFPISA and Financial Services Agreement (FSA) signed by Faith Universal. These clauses explicitly stated that any email instruction “purporting to be from the Customer” would be considered “duly authorised and binding”, and limited the bank’s responsibility except in cases of gross negligence.
Justice Carrington agreed that, generally, these tightly drawn clauses protected RBC from liability.
“I must agree with the submission by counsel for the Defendant/Ancillary Claimant that the parties are bound by clauses 2 and 6 . . . [which] would amount to a complete defence in the matter, barring the finding of negligence,” the Judge wrote.
Quincecare duty of care
The Court ruled that these exemption clauses were not inviolable. Citing the Caribbean Court of Justice (CCJ) ruling in Caye International Bank Ltd v Rosemore International Corp, Justice Carrington held that express contractual terms cannot exclude a bank’s Quincecare duty of care, a legal principle requiring a bank to refrain from executing a payment if it has reasonable grounds to believe the instruction is an attempt to misappropriate funds.
“Exemption/exclusion clauses cannot exclude the quincecare duty of care except by clear words in the clauses to that effect,” Justice Carrington ruled, noting that no such clear words existed in RBC’s mandates. “Once put on inquiry, there was an implied contractual term that the Defendant/Ancillary Claimant would exercise reasonable skill and care . . . . I have seen no evidence that that was done.”
The Court’s finding centred on whether RBC was “put on inquiry.” Justice Carrington meticulously detailed a series of glaring red flags that should have alerted a reasonable and prudent banker to the possibility of fraud:
• The signature on the very first transaction was illegible, prompting an RBC employee to ask for a clearer copy rather than verifying with the client.
• The payments were increasingly large, round amounts that quickly exceeded the account’s stated anticipated turnover of US$100 000.
• Funds were being paid to accounts purporting to be in Wadhwa’s name in remote jurisdictions like Australia, Ireland, and the UK, a highly unusual pattern for business expenditure.
• Multiple transfers were returned by overseas beneficiary banks due to mismatched beneficiary names and account numbers.
• RBC’s own staff generated Unusual Transaction Reports (UTRs) and a Suspicious Activity Report (SAR) during the window the transactions were occurring.
The judge also noted that Wadhwa had provided RBC with a dedicated, secure email address upon opening the account. The fraudster used a completely different Yahoo email address. Yet, RBC never contacted Wadhwa directly to verify the transactions until March 8, 2016, after all 11 fraudulent transfers had been completed.
“The first transaction by which there was uncertainty about Mr Wadhwa’s signature, was enough to put the Defendant/Ancillary Claimant on inquiry and the customer should have been contacted at the listed email address,” the Judge stated. “No third party in the instant case, Mrs Brathwaite [of Mithril], contrary to the Defendant/ Ancillary Claimant’s Know Your Customer (“KYC”) guidelines, could ensure that Mr Wadhwa’s account was protected.”
RBC also attempted to shield itself by arguing that Mithril Investment Advisors and specifically its officers, Mr and Mrs Brathwaite – acted as Faith Universal’s authorised agent, meaning RBC was justified in relying on their confirmation of the payments.
Justice Carrington also rejected the bank’s argument that RBC was justified in relying on the confirmation of payments from Mithril Investment. Pointing out that Mithril was merely an administrative intermediary, he said: “That administrative process did not make the Ancillary Defendant the authorised signatory.”
Consequently, the Court dismissed RBC’s ancillary claim seeking indemnity from Mithril. “The ancillary defendant was simply a facilitator of the fraudster’s requests, which would not have succeeded if the defendant/ancillary claimant had contacted Mr Wadhwa directly about the transactions,” Justice Carrington concluded.
Faith Universal Investments, represented by attorneys, Lani Daisley, Marilyn Moore and Olius David of Moore Daisley, secured a sweeping victory as the court ordered RBC to pay the claimant the unrecovered sum of US$615 172.79 as well as pre-judgment interest which was set at three per cent per annum from the date the claim was filed in January 2017, shifting to six per cent post-judgment until payment is made.
RBC was also ordered to pay the legal costs for both Faith Universal and Mithril. (MB)