Secondary Liability of Financial Institutions for the Fraud of Third Parties
Hong Kong Law Journal, Vol. 30, p. 74, 2000
Posted: 18 Aug 2006
This article examines the circumstances in which one person may attract liability for the fraud of another person. In common law systems, fact situations are traditionally distinguished according to whether the person concerned assisted in the fraud, or beneficially received the proceeds. The issues have been characterised as arising under the law of trusts, and labelled 'knowing assistance' and 'knowing receipt' respectively. Knowing assistance is now clearly established as a fault-based form of accessory liability, requiring dishonesty on the part of the accessory. In the case of knowing receipt, the liability of the recipient is restitution-based, but there is no consensus as to the degree of fault required. A strong body of opinion favours abandoning fault altogether, and focusing instead on change of position as a defence. This article seeks to consider the issues specifically from the perspective of banks and other financial institutions. They are almost always caught up in fraudulent activity of any magnitude, if only as the innocent holders and transmitters of funds. Fixing appropriate liability rules raises significant policy issues taking into account the need to protect the victims of fraud and encourage high standards in the financial sector, and yet avoid imposing unrealistic burdens which would be borne ultimately by innocent depositors.
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