What happens when a fraudster contacts a private bank with the intention of duping it into laundering his ill-gotten money, while bribing a relationship manager to produce false KYC evidence in the process? In an English case, a blameless non-trading Swiss private bank has been held liable for the renegade RM's actions.

Prosecutors from various countries are using vicarious liability as a weapon in the courts of England and Wales against international companies that have never so much as set foot in that jurisdiction. It is therefore vital for international companies to be aware of the wide-reaching arm of English law and this area of law in particular.

Vicarious liability is not a new concept – it is a long-standing principle of English common law which imposes legal responsibility on employers for actions committed by their employees in the course of their employment.  In the past, courts were reluctant to impose undue burdens on employers, but a number of recent English decisions have extended the reach of vicarious liability and such claims now have very significant implications for companies. So what can businesses do to protect themselves against liability for the actions of rogue employees?

Group Seven – an overview

Group Seven was a major civil fraud case concerning the theft and laundering of €100 million. Sonia Tolaney QC and Michael Ryan, instructed by Alan Sheeley, acted for the Swiss private bank LLB Verwaltung (Switzerland) AG in its appeal.

The proceedings arose out of a fraud which saw a Maltese company, Allseas, swindled out of €100 million by fraudster called Luis Nobre. Allseas' executives were enticed into handing over €100 million to what they thought was a get-rich-quick investment scheme offered to high-net-worth individuals and supposedly supported by the Vatican bank, the US Federal Reserve and the United Nations.

What does a fraudster do when he gets his hands on €100 million? He must try to find somewhere to put it without raising suspicion. This is not an easy thing to do!

Mr Nobre initially tried to open an account through his company, Larn, with LLB's Abu Dhabi representative office. LLB, to its eternal credit, declined to open the account because its compliance officer became aware of problems to do with the source of funds. After LLB's refusal, Mr Nobre kept in contact with a relationship manager based in the Abu Dhabi office – one Mr Louanjli.

Mr Nobre then directed the payment of €100 million into the client account of Notable Services LLP, a law firm in London. Notable’s members included an accountant called Mr Landman (a key character in the fraud, as we shall explain below), and two solicitors, Mr Meduri and Ms Ciserani. As part of Notable's compliance obligations, it sought to verify the source of the funds by obtaining a formal reference of good standing in relation to Mr Nobre from Mr Louanjli. The court ruled that Mr Meduri and Ms Ciserani determined that the source of funds was clean, according to what they had been told. Unbeknown to them, Mr Nobre had procured Mr Landman's (and therefore Notable's) and Mr Louanjli's help by means of personal bribes.

A false 'duly diligent' statement, followed perhaps by a SAR

In return for his bribe, Mr Louanjli gave Mr Nobre a brief false reference. Mr Louanjli declined to write a formal reference for Mr Nobre based on a sample reference which Mr Nobre had provided. Instead, he gave an oral statement and sent an email (from his LLB email address) to Notable.

The oral communication, made on the telephone, broadly confirmed that Mr Louanjli worked for LLB, that Mr Nobre had been LLB's client for a certain amount of time and that LLB had successfully completed the KYC procedure on the source of funds. Mr Louanjli agreed to send a follow-up email to Notable. The email was brief to say the least, stating:

Dear [Notable]
I would like to confirm That Mr. Louis Nobre is well known to [LLB] and did satisfy to the KYC and due diligence that we did run during his account opening process.
Hope this will Help.
Please feel free to contact me if you have any queries.

Relying on Mr Meduri's and Ms Ciserani's 'due diligence' and the references, Notable accepted the €100 million into its client account. Mr Nobre then gave instructions to Notable to make a series of 42 payments out of its client account. Mr Landman, in return for his bribe, helped Mr Nobre by obtaining Mr Meduri's authorisation to pay away part of the €100 million. The City of London Police discovered the fraud after approximately €12 million had been paid away and stopped further payments.

The Notable client account was with Barclays Bank. It seems that Barclays reported these activities in relation to the Notable client account and the police became involved. As a result of their intervention, a judge froze the remaining monies and eventually, after some of the €15 million was returned to Notable, around €88 million was returned to Allseas.

The problem with reliance

To return to the case, the High Court held that Notable had relied on Mr Louanjli's oral statement and email. The representations encouraged Notable (and in particular Mr Meduri and Ms Ciserani) to regard Mr Nobre as reliable and entitled to deal with the €100 million. Accordingly, Mr Louanjli was held liable for dishonest assistance in Larn’s breach of trust and conspiracy to injure the claimants (plaintiffs). LLB, Mr Louanjli's employer, was held vicariously liable to the claimants for these acts of wrongdoing by Mr Louanjli.

A number of features are important to note. The claimants had never heard of LLB, Mr Louanjli, Mr Landman or Notable. There was no direct connection between LLB (a Swiss bank) or its Abu Dhabi Office (where Mr Louanjli was based) and the claimants (a combination of Swiss, Maltese and Panamanian companies). The claimants were not aware that the €100 million had been paid into an English account and Mr Louanjli did not know who the claimants were. Despite all this, LLB has been held vicariously liable to the claimants under English law.

In the Court of Appeal, LLB was successful in overturning the High Court judge's findings in relation to Mr Landman's and Notable's dishonest assistance, making them also liable to the claimants for their loss. The Court of Appeal, however upheld the High Court's decision to hold LLB vicariously liable for the dishonest conduct of Mr Louanjli.

Group Seven and vicarious liability

More than 15 years ago, the House of Lords, in Lister v Hesley Hall (2001), established the "close connection" test which has since been applied in vicarious liability cases. This provides that there should be a sufficiently close connection between the employee's work and the wrong committed so that it would be just and fair to make the employer vicariously liable.

In Group Seven, the High Court and Court of Appeal agreed that the "close connection" test established in Lister, as confirmed and restated by the Supreme Court in Mohamud v Wm Morrison Supermarkets (2016), should be followed.

In Mohamud a supermarket was held vicariously liable for the actions of its employee, a Mr Khan, a petrol pump attendant whose job was to serve and help customers. After a heated discussion, Mr Khan left the petrol kiosk and approached Mr Mohamud in his car and proceeded to assault him, despite being told directly to stop by his manager.  

English courts are growing more and more willing to impose vicarious liability on companies. Other examples include Various Claimants v Wm Morrison Supermarkets (2018), in which the Supreme Court found that an employer was liable for its employee's deliberate leakage of personal data about other employees and its extension of the principle to cover independent contractors in Various Claimants v Barclays Bank Plc (2018) – notwithstanding that both of these cases are the subject of appeals, so we may yet see the battle lines shift once again.

Two vital questions for banks

As things stand, vicarious liability in England and Wales gives rise to these two important questions for employers around the world.

• What activities are you entrusting to your employee - i.e. what is the broad nature of the employee's job?
• Is there a sufficient connection between the position in which he is employed and his wrongful conduct to make it right for your firm to be held liable?

In Group Seven, LLB criticised the High Court judge's conclusions about the field of activities entrusted to Mr Louanjli. LLB argued that in Switzerland relationship managers did not give 'references' (even in the widest sense) and it was not within Mr Louanjli's authority to give anyone the kind of information he conveyed in the oral statement and email.

The court was asked to look at LLB internal banking directives, which clearly stated that:

• relationship managers did not have the authority to sign documents on behalf of LLB in order to subject it to an obligation or commitment;
• two authorised signatures were necessary for these documents to be binding;
• letters of confirmation or recommendation could not be given for people or companies that had never maintained a relationship with LLB; and
• official forms always had to be used rather than formulations prescribed by the client.

Within the nature of the job

The question for the Court of Appeal was whether Mr Louanjli's actions were within the nature of his job as a bank relationship manager, viewed broadly, and whether there was enough of a connection between that position and his wrongful actions. The court decided that it ought to consider this objectively (i.e. by looking at whether the 'reasonable man' would view things in this way) and took the following into account in upholding the decision to hold LLB vicariously liable.

• LLB employed Mr Louanjli as a relationship manager and had been the LLB relationship manager for Mr Nobre/Larn.
• Mr Louanjli was giving information which purportedly emanated from LLB when he gave the statements.
• Notable believed that Mr Louanjli was acting within his authority (even though he was not).
• Notable made checks to confirm that LLB employed Mr Louanjli.
• Notable wished to hear from the manager precisely because he was described to its as the client’s relationship manager at LLB.
• Mr Louanjli's statements were "expressed to be made by him as a relationship manager at LLB and not otherwise."

The Court of Appeal agreed that in deciding what a wrongdoer's field of activities was, it was relevant, in general terms, to consider (i) that person's contract of employment and (ii) any directives about the way in which he should carry out his functions. The court also, however, said that this was only the beginning of the enquiry and could not be determinative because, if it were, the scope of vicarious liability would be narrow and the majority of the central cases in this area would have been decided differently. The court reiterated its point that the imposition of vicarious liability is extremely sensitive to facts.

The nature of the problem

Group Seven shows us that even a trivial connection between an employee's job and his wrongful act can now make companies vicariously liable in situations where the courts used to be reluctant to impose liability. Vicarious liability might endanger employers even when they are not aware of any wrongdoing at the time, and whether or not they are in England or Wales.

* Alan Sheeley (Pinsent's head of civil fraud and asset recovery) and his assistant solicitor Rachelle Issa can be reached respectively on +44 (0)207 054 2626 or alan.sheeley@pinsentmasons.com and +44 20 7490 6245 or rachelle.issa@pinsentmasons.com