Can a bank be liable for the wrongful acts of its customer? The frustrating and unsatisfying answer: It depends.
Lawsuits against banks for aiding and abetting the wrongdoing of their customers are frequent, as highlighted by the recent rash of litigation accusing banks of assisting their clients’ high-profile Ponzi schemes. And the stakes are high. Earlier this year, a jury in Florida awarded $67 million to an investor group that accused TD Bank of facilitating a $1.2 billion fraud perpetrated by its customer, Scott Rothstein, a now disbarred lawyer serving a 50-year prison term.
In some cases, a bank's liability is obvious. For example, an employee's active involvement in the customer's misdeeds is all but certain to expose the bank to liability. In other cases, however, a fine line separates a finding of no liability and exposure to a massive jury verdict.
The requirements of an aiding and abetting claim are easy enough to articulate and are essentially the same throughout the country although a small number of jurisdictions do not recognize the cause of action at all. They are: an underlying violation (e.g. fraud) by the bank's customer; knowledge of that violation by the bank and the bank's substantial assistance of its customer. The difficulty arises with how judges interpret the knowledge requirement.
Bank risk and compliance personnel are familiar with the various red flags in federal anti-money laundering regulations. And banks have their own internal triggers for identifying suspicious behavior, some of which may lead to the filing of Suspicious Activity Reports mandated by the Bank Secrecy Act. Often times, plaintiffs attempt to satisfy the knowledge requirement by referring to a bank's knowledge of these red flags or suspicious behavior.
Some courts emphatically reject that argument, finding that actual knowledge is required. These courts conclude that even ignoring obvious warning signs is not enough. One judge threw out aiding and abetting claims even though the customer's unusual conduct resulted in a referral to an in-house fraud investigation unit.
Other courts, however, take a different tack. Some conclude a bank may be liable because it should have known of the customer's violation or should have discovered it through adequate due diligence. These courts have found that a bank's deviation from its established procedures sufficiently satisfied the knowledge requirement. For example, one court allowed a case to go to trial even though the plaintiff only alleged that the bank violated its own internal procedures and that a bank employee was the daughter of the Ponzi scheme's operator. These rulings defy any bright-line standard, leaving judges (and later juries) to engage in a subjective, sliding-scale analysis of whether and what type of information is enough to hold a bank secondarily responsible for its customer's violation.
Other courts find a middle ground between these two approaches. They are agreeable to finding liability if a bank was "willfully blind” to a customer's wrongdoing. Willful blindness occurs under this standard when a bank realized its customer may be engaged in wrongdoing, but consciously avoided confirming that fact in order to later be able to deny knowledge.
And yet the public policy rationale behind a black-and-white, actual knowledge standard is compelling. Liability for anything less would impose an unreasonable standard on banks. Any whiff of possible wrongdoing would compel a bank to terminate its relationship with the customer, yet still leave the bank exposed to liability from before the account was closed. Requiring actual knowledge, by contrast, gives banks providing honest services a fighting chance to manage the risks brought on by their customers.
But there's no knowledge standard that can eliminate these risks entirely. In a challenging regulatory environment, banks should have to ask a simple question: Do we know that our customer is engaged in wrongdoing?
Bankers are not policemen, nor are they private detectives and they shouldn't be held to some subjective standard. They should only be held responsible in a civil aiding and abetting lawsuit when they actually knew their customer was engaged in wrongful conduct. Otherwise, the knowledge requirement has little, if any, meaning at all.
Cory Hohnbaum and David Guidry are partners with the international law firm King & Spalding LLP.