A young man shows up at the Bank and asks that the accounts of an octogenarian customer be transferred into a joint account with himself. When questioned, he advises the banker that he is the customer’s nephew and presents a Power of Attorney. The document presented is newly typed and has a shaky, illegible signature at the bottom. The elderly customer, normally a regular at the bank, has not been seen at the bank for several weeks. If the banker honours the Power of Attorney, she may be facilitating fraud against the elderly customer and the Bank will be liable. If she refuses to take instructions from the young man purporting to be the attorney, she may be in breach of the Bank’s contractual obligations to follow the instructions of the customer and his agent, and the Bank will be liable.
Over the next few decades, this situation will become more common, and banks and other financial institutions will have to anticipate such problems and develop policies to protect their customers and themselves. In the last decade, the financial abuse of elders has been on the rise. In 1998, reported cases indicated that over 10% of Canadian elders were subjected to financial abuse and exploitation. The 1998 National Abuse Incidence Study found over half a million persons in Canada over the age of 60 had reported financial abuse. The study further estimated that the actual number was four times higher – in other words, as many as $2 million elders were victims of financial abuse.
Who are these abusers? Ninety percent of known perpetrators of abuse against elders are family members. Two-thirds of abusers are the adult children or spouses of the seniors. The problem is demographic – the elders of today were children of the depression, a generation who saved their money. Their offspring are baby boomers, a generation of “entitlement”, unemployment and increasing housing expenses. Many are already spending what they expect their inheritances to be and may be tempted to help themselves to the money earlier than the passing of the senior.
The fact that the perpetrator of the fraud against the elder is likely a family member makes detection and prevention more difficult from the Bank’s perspective. Who should the banker call? How can the Bank protect the elder when there may be no one else prepared to stand up for them?
There are very few safeguards against financial exploitation of elders in the Canadian legislation establishing Continuing Powers of Attorney. Despite the lack of statutory protection or judicial guidance, the courts have in several instances decided that as between the wealthy Bank and victim of fraud, the Bank bears more responsibility. This is referred to as “the law of two innocents” by the courts, and as “the law of the deep pocket” by litigators.
There are now several cases which have established the Bank’s duty to investigate fraud. These cases involve situations where a customer has been defrauded by a third party through theft of monies held by a Bank. The banks are sued in negligence: they owe a duty of care to the customer to better monitor this aberant banking activity and they breached the reasonable standard of care.
The seminal case in banker’s liability for fraud is Groves-Raffin Construction Ltd. et al. v. Bank of Nova Scotia et al. (1975) 64 D.L.R. (3d) 78 (BCCA). Here, the defendant Bank honoured a company cheque signed by Groves, an officer of the plaintiff company with bank signing authority, which was made out in favour of the same Groves. The cheque was for a very large amount for a relatively small company and, in fact, constituted almost all its funds. The court held:
“A banker’s duty to his customer involves not only the primary and axiomatic obligation to carry out its function as a banker to honour and pay its cheques when funds are on credit, but to exercise such care as a reasonable banker would consider requisite to ensure that what is suspicious or questionable is queried. So, duty of care may involve in circumstances a duty to make inquiry. The test is an objective one, that of a “reasonable banker”.”
The trial judge held that a bank has a duty under its contract with its customer to exercise “reasonable care and skill” in discharging its obligation with regard to operations within its contract and its customer. The standard of that reasonable care and skill is an objective standard applicable to bankers. Whether or not it has been attained in any particular case has to be decided in the light of all the relevant facts, which can vary almost infinitely.
On appeal, the Bank did not question these foregoing principles of law. It founded its appeal on the basic ground that its primary obligation was to carry out its duty of paying cheques drawn by its customer through the signature of an authorized signing officer in accordance with the contractual arrangement between the bank and its customer.
The Court of Appeal concluded that when the Bank honoured the cheque without making any inquiry, it did not discharge its duty to the plaintiff company to exercise reasonable care and skill. A number of considerations led the Court of Appeal to this opinion:
- The Bank had more than the usual “very limited time in which banks have to decide what course to take with regard to a cheque presented for payment without risking liability for delay”.
- The transaction was unusual and out of the ordinary course of business, given that the cheque was signed by Groves and was in his own favour; that the cheque was for a very large amount; and, that it was for almost the entire balance in the account.
- The fact that the cheque was in favour of the signatory personally should have aroused suspicion in a reasonably alert banker and give rise to a special necessity to be careful.
- In the circumstances the careful and reasonable thing for the Bank to have done before honouring the cheque would have been to make inquiry.
If these principles are applied to the example at the outset of this article, the banker would clearly be required to investigate the nephew’s alleged authority under the Power of Attorney.
The principle of two innocents is applied to bank fraud in J & F Transport Ltd. Et Al. V. Markwart et al., (1982) 136 D.L.R. (3d) 204. There, the plaintiff corporation employed as a bookkeeper M, whose duty was to deposit cheques payable to the plaintiff in its account at the bank. M fraudulently opened a second account at the defendant Bank in the plaintiff’s name, designating himself as the person with sole signing authority. He misappropriated cheques payable to the plaintiff corporation by paying them into the second account and withdrawing the proceeds. In an action by the plaintiff corporation against the defendant Bank, the court found that the loss was caused by the Bank’s negligence in opening an account for an individual in the name of a corporation without making inquiries.
The court held that the correct approach is to assess the situation on the principle of two innocents. Where two suffer for the fraud of a third, the one who most enabled that third party to create the fraud should bear the loss. The court found no negligence on the part of the plaintiff corporation in not supervising in any closer fashion the work of its bookkeeper and applied the principle of two innocents. The Bank was liable. Consider this case in the context of an incapable elder.
The caselaw also requires banks to ascertain and honour the real intentions of the customer, even in the face of documents indicating the contrary. This adds another level of challenge for the Bank.
What are the “red flags” for the financial institution? Here are a few:
- Abrupt change in attorney;
- Physical absence of senior person;
- Significant withdrawl of funds;
- Inclusion of new names on the senior’s signature card;
- Creation of joint accounts with the attorney or transfer of funds to the attorney;
- Unpaid bills despite adequate funds; and
- Forgery
There is very little direction from the courts as to how banks are to investigate and detect fraud, let alone what steps can be taken to stop the fraudulent conduct that do not breach the bank customer’s confidentiality. They are simply required to protect the victimized customer or to face the consequences. Here are some suggestions, however:
- Contact the elder customer and interview them in private (perhaps more than once);
- Consider contacting the customer’s family doctor on a confidential basis;
- Compare signatures on the power of attorney with other bank documents;
- Contact the lawyer who prepared the power of attorney;
- Contact the Advocacy Centre for the Elderly; or
- Contact the police.
Financial abuse of elders is a looming societal crisis. Those on the “front line”, such as banks, financial institutions, doctors and lawyers, bear a legal and moral responsibility to this vulnerable group in our society to protect them from abusers. Such protection may take the form of legislative reform, focus on institutional protective procedures or increased diligence in drafting Powers of Attorney that limit potential financial exploitation. The first step, however, is awareness of the problem and education about the legal solutions and obligations.
By Susan J. Heakes
Posting Note:
We understand that this is an old article that may contain dated information, but still worth the read. The author was a partner at Heenan Blaidie LLP. This firm no longer exists.