Rising fraud suits put banks on the spot over tried, tested due diligence
Prudential guidelines require banks to be sure about the legitimacy of funds and transactions.
A growing number of commercial banks in Kenya are battling court cases for allegedly abetting fraud and credit scams, exposing the lenders’ inadequacies in conducting due diligence when opening customers’ bank accounts and monitoring financial transactions.
Also emerging from the legal tussles is the quality of the duty of care banks owe customers in a contact.
Failure to carry out Customer Due Diligence (CDD) has also seen the lenders pay heavy damages.
Various top lenders such as Equity Bank Limited, Cooperative Bank of Kenya, Eco Bank, and Standard Chartered have been caught up in fraud scams, where impostors have been receiving money instead of the actual and intended recipients after opening parallel accounts.
In the latest case, First Community Bank has been ordered to pay Jumbo Foam Mattresses Industries Limited Sh1.2 million for negligence that allowed fraudsters to divert cash from the Kisumu-based mattress manufacturing company.
Jumbo moved to court in February 2017 after fraudsters opened an account at the bank using forged documents and the company’s name. The account was opened on February 24, 2014.
Its main claim was that the bank was reckless in allowing an account to be opened and operated in the name of the company by persons who were not directors or employees of the mattress maker.
The said individuals opened a bank account in the company’s name and banked several cheques stolen from its account’s office and withdrawals made.
The account was opened to advance fraudulent activities on the company through the theft of cheques, which were drawn in its name at the bank.
Banking Fraud
Upon reporting the issue to the Banking Fraud Investigating Unit, the company found that the individuals had colluded with the bank’s agents and caused cheques amounting to Sh1,225,398 drawn in the company’s name to be banked in the said account. A sum of Sh715,595 was thereafter withdrawn.
Jayeshkumar Trikambhai Patel, a director with the company, stated that the documents and details used by the unknown individuals to open the account were not authentic. He accused the bank of being negligent and facilitating the fraud leading to the loss of money.
It was argued that the bank colluded with the fraudsters to facilitate the opening, operation, and withdrawal of the money from the account. The bank failed to carry out due diligence and also violated the law and rules of banking.
The magistrate court in Kisumu had dismissed the company’s case but the High Court Judge Roselyne Aburili overturned the judgment and ruled in favour of the mattress firm.
The judge found that the individuals who opened the account were “indeed fraudsters who used forged documents to have the account opened in their favour.
“These individuals were unknown to both the company and the bank,” said Justice Aburili. She, however, stated that the bank did not aid in the fraud as the documents presented were forgeries.
“I hold that the respondent was not fraudulent and neither did it aid in perpetrating the fraud in the entire transaction,” she held.
The court also found that the bank failed to exercise the due diligence expected of a banker when it opened and allowed the operation of the account in the manner it was operated, leading to a loss of money on the company’s part.
“Evidence of Hawo Bora Godana (the bank’s Customer Service Representative) that the bank did not conduct a search at the company’s registry shows that the bank deviated from the norm and abrogated its duty to the members of the public,” said the judge.
“There is sufficient evidence that if the bank had carried out due diligence on the directors of the company, it could have easily found out that the individuals opening the account were not the actual directors,” the judge stated.
Loss of money
“I am satisfied that the bank had proved on a balance of probabilities that that the bank was negligent in the manner that it handled the entire transaction with the persons who turned out to be fraudsters, leading to the loss of substantial sums of money where its cheques were deposited and withdrawn from an account opened and operated by the fraudsters,” said the judge.
The bank also failed to adhere to the prudential guidelines developed by the Central Bank of Kenya (CBK).
The Prudential Guidelines place a duty on all banks to make enquiries regarding the legitimacy of funds and transactions.
The Guidelines require that a bank make enquiries on a case-by-case basis for large, frequent or unusual transfers in relation to the parties and the nature of the transaction.
“The bank having admitted that it failed to adhere to the prudential guidelines, cannot escape liability for the loss of money,” said the judge.
The banking industry in Kenya is governed by the Companies Act, the Banking Act, the Central Bank of Kenya Act, and the prudential guidelines issued by the Central Bank of Kenya (CBK).
Other banks which have since found themselves fighting claims of negligence and fraud-related suits include Ecobank, Equity Bank, Standard Chartered Bank, Giro Commercial Bank, and Southern Credit Banking Corporation Limited.
Ecobank was last month sued over a Sh4 billion fraud case involving an online payment company that had been linked to an international credit card scam syndicate.
The financial institution faced two lawsuits in which it was accused of conspiring with the foreign company— Kiwipay— and some Kenyans to fraudulently withdraw money belonging to two clients, who were also associated with the company.
In one case, the lender was alleged to have authorised the fraudulent withdrawal of more than Sh2.8 billion held in three bank accounts belonging to Monthida Rashi from Laos, an Asian nation.
The claim by Ms Rashi came days after another company, Avistia S.R.O Ltd, sued Ecobank for allowing the release of $13,473,110 (Sh1,653,824,252) from its three accounts by Kiwipay.
Equity Bank was caught up in a Sh36 million fraud perpetrated by Abong Bildad Onyango, who was an advocate of the High Court of Kenya and a customer of the bank.
On July 1, 2008, Don Ogalloh Riaro, instructed the law firm of Oraro & Co. Advocates to act for him in the purchase of two properties located in Karen in Nairobi.
On the strength of the official search, Riaro signed a sale agreement with the purported vendors of the property acting through the law firm of Abong Bildad Onyango.
It later turned out that the purported vendors were fake and a fraud and Mr Onyango had no instructions or authority from the true owners of the property to sell.
Court held that the bank owed a duty of care to the land buyer and that duty was breached and as a result, he suffered the loss.
Despite the express requirement under the CBK Prudential Guidelines, the bank never inquired into the nature of the transaction that the lawyer was engaged in that led to the withdrawal of large amounts of cash over the counter.
Southern Credit Banking Corporation Ltd was also caught up in a Sh4 million fraud involving accounts opened by two individuals in November 2004 posing as directors of Kenya Grange Vehicle Industries.
The two signatories were neither directors nor shareholders of the company.
The lender was said to be negligent in the opening of the bank account and accepting 10 cheques to be credited to the accounts.
In collecting the proceeds of the cheques for holders who did not have any legal title and crediting the same to the account, the lender had denied the company, the true owner of the said cheques, the proceeds.
