In a recent judgment, the High Court has dismissed fraud claims brought by the liquidators of Transworld Payment Solutions (TWPS) against First Curaçao International Bank (FCIB) and its owner, Mr John Deuss. 

The Claimants alleged that, by providing banking services, FCIB and Mr Deuss had dishonestly assisted the directors of a number of companies to commit VAT fraud. They alleged that the companies had incurred over £220m in VAT liabilities as a result of this assistance, and claimed compensation from the Defendants in relation to the debts owed to HMRC.

Dismissing the claims, the Court found that the Claimants had failed to establish that Mr Deuss (on his own behalf and as an officer of FCIB) was dishonest. Proof of dishonesty will always be fact-dependent. In this instance, the Court held that it could not infer from the available evidence that Mr Deuss subjectively knew or suspected that most of FCIB’s customers trading in the telecoms and computer components (T&C) sector were engaged in fraud. The decision is a clear reminder that dishonesty must be made out on the evidence, and will not be inferred from facts equally consistent with honesty. 

Background 

VAT ‘carousel’ or ‘missing trader intra-community’ (MTIC) fraud is a form of tax fraud which became prevalent in the early 2000s in the European Union (taking advantage of EU VAT rules). Companies in the T&C sector were a common vehicle for MTIC fraud because of the easy and rapid ability to trade in the relevant goods.

Taking the UK as an example, MTIC fraud involved a UK VAT registered company importing goods into the UK VAT-free from another EU member state, transferring the goods on to a different UK company and charging VAT on the sale, and then failing to remit the VAT to HMRC before disappearing. The goods would generally change hands domestically several times before being sold back to a company in another EU member state. This allows the fraud to be repeated multiple times, with the same goods being circulated by a network of traders. 

The claims

Several T&C companies involved in MTIC fraud (the MTIC Companies) used bank accounts with FCIB to transact their trades. As a result of their participation in the fraudulent MTIC scheme, the MTIC Companies accrued substantial VAT liabilities to HMRC. 

The Claimants’ case was that the MTIC Companies incurred these VAT liabilities as a consequence of breaches of fiduciary duty, which their individual directors had committed by dishonestly participating in the MTIC fraud. 

The Claimants alleged that by providing banking services to the MTIC Companies in the face of obvious indicators of MTIC fraud, FCIB was liable for the equitable wrong of dishonest assistance in the breaches of fiduciary duty by the MTIC Companies’ directors. The only individual at FCIB against whom the Claimants alleged dishonesty was Mr Deuss.

For more information on dishonest assistance generally, see our articles A guide to secondary liability – part one: dishonest assistance and Equitable compensation for dishonest assistance: “It’s mine” .

The MTIC Companies assigned their claims to TWPS, whose liquidators brought this claim.

The principal issue: dishonesty 

Summary

To succeed, the Claimants needed to demonstrate that Mr Deuss was dishonest. Their case was that Mr Deuss knew or shut his eyes to the fact that the T&C sector was rife with MTIC fraud and that reputable banks had pulled out of financing the sector as a result. They argued that Mr Deuss had seen this de-banking of the sector as a business opportunity for FCIB and that he had decided deliberately to pursue it despite the prevalent fraud.

It was common ground that the test for dishonesty outlined in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 applied. The Court first had to ascertain Mr Deuss’ subjective state of mind, and then determine whether his conduct, given that state of knowledge, was dishonest measured by objective standards.

Usually, allegations of dishonesty would be put to the defendant directly in cross examination at trial. However, in this case Mr Deuss was unable to attend trial to give oral evidence for medical reasons. This meant that there had to be an increased focus on the documentary evidence and, as the Court noted, the Claimants’ case would ultimately stand or fall on the documents.

In short, the Court was not satisfied that Mr Deuss had a clear suspicion that the vast majority of prospective customers in the T&C sector were engaged in MTIC fraud. Rather, the Court accepted that Mr Deuss believed that there were a significant number of legitimate T&C customers who were looking for banking services and that FCIB could provide these services to them as long as it had appropriate compliance procedures in place. 

The evidence

The Claimants’ allegations that there was no legitimate market in the T&C sector, or that the majority of FCIB’s T&C customers were engaged in MTIC fraud, were not made out on the evidence. It was a notable weakness in the Claimants’ case that they did not seek to provide expert evidence to support these allegations. The Claimants could – and should – have instructed an expert on this topic if they wanted to establish their case that more than half of T&C traders were engaged in fraud. An expert witness could also have analysed FCIB’s T&C customer accounts to look for evidence showing that MTIC fraud was prevalent among them. 

The Court accepted that Mr Deuss believed that there were always UK banks servicing the T&C sector. Indeed, the evidence indicated that although many banks were reducing their exposure to the T&C sector, the principal UK high street banks and reputable foreign banks were continuing to provide banking services to at least some customers in that sector during the relevant period.

The Court found that the documents relied upon by the Claimants to support allegations of Mr Deuss’s dishonesty were equally consistent with Mr Deuss’s honesty. This meant it was not open to the Court to find dishonesty on the balance of probabilities. 

For example, the Claimants suggested that the term ‘closed loop’ was used in FCIB documents as a euphemism for networks engaged in MTIC fraud. However, the Defendants provided examples of the term being used innocently to refer to a common infrastructure for making payments. The Court further noted that all of the documents relied on by the Claimants containing this term were (with one exception) not authored by Mr Deuss. The use of the term could not, therefore, be evidence of dishonesty on Mr Deuss’s part. Similarly, the Claimants alleged that FCIB’s backlog of enhanced due diligence indicated a lack of concern or even a deliberate decision on the part of Mr Deuss to delay implementing the process. However, the Court found that the backlog was equally consistent with his honesty and could simply indicate that the risk department at FCIB did not have sufficient expertise or manpower to deal with it.

The Claimants also failed to prove their case that Mr Deuss had decided FCIB should seek to dominate provision of banking services to the T&C sector by sacrificing compliance with FCIB’s anti-money laundering procedures. There was no evidence that Mr Deuss was prepared to put profit before compliance, and it was not reasonable to draw this inference in circumstances where, on the contrary, Mr Deuss also had strong motivations not to assist in MTIC fraud given the reputational and financial risks it would pose to FCIB.

The Court rejected assertions made by the Claimants that documents adverse to their case could be explained away as a false ‘paper trail’ laid in case of later investigations. In the absence of evidence to the contrary, the Court considered it inherently unlikely that Mr Deuss did not believe what he said to his close advisors at the time. As such, the Court placed significant weight on Mr Deuss’s reaction to concerns about the legitimacy of the T&C sector and described his actions (which included giving instructions for existing T&C customer accounts to be analysed and for expert advice to be taken on FCIB’s existing policies) as the reaction of an ‘honest banker’ to becoming aware of the heightened risk of fraud. 

The Court also drew attention to the difficulties faced by claimants who allege dishonesty against just one individual in a large organisation. In such a case, claimants will need to be able to explain why other company officers were not dishonest when dealing with the same matters. For example, the Claimants had alleged that Mr Deuss deliberately downgraded the T&C sector from ‘High Risk’ to ‘Medium Risk’ in FCIB’s risk scoring model to allow more applications from T&C traders. However, the risk scoring model was the product of input by all senior management of FCIB. If that decision was one that no reasonable banker would make, it would surely have been flagged by the other senior managers involved, unless they too were party to a dishonest scheme.

Conclusion

Transworld demonstrates the prime importance of ensuring that a case for dishonesty is made out on the evidence. The judge remarked that in such a document-heavy case as this, it was significant that the Claimants could not point to any “smoking gun” documents from which the Court could clearly draw the inference that Mr Deuss was dishonest. A claimant alleging dishonest assistance will need to marshal cogent evidence of the alleged accessory’s subjective knowledge that does not, on the balance of probabilities, allow for plausible, honest explanations. Ultimately, the judgment in Transworld demonstrates that dishonesty will not be inferred from equivocal material.

The case is also a good example of a key challenge faced by those alleging fraud and dishonesty – deciding which natural persons are responsible. Alleging that just one individual was dishonest brings with it the difficulty seen in this case of explaining how other, honest people who were involved failed to notice and prevent the conduct. But by contrast, alleging that a large number of people were involved can make a case appear implausible by virtue of suggesting dishonest conduct was widespread in an organisation. Claimants must therefore consider very carefully whose conduct is truly imputed with dishonesty by the evidence. 

For many years, governments of all types have focused on the supply chains used by criminals as a means of cutting off such activity. What this case demonstrates is the difficulty in targeting those supply chains and why there has been an increasing trend towards shifting the burden of tackling tax fraud (along with other economic crime) onto third parties and intermediaries. For example, HMRC’s response to the problem of MTIC fraud involved applying the Kittel principle, which allowed them to deny input tax to ‘innocent’ taxpayers where an MTIC fraud occurred in their supply chain if they knew, or should have known, that the transaction was connected with fraudulent evasion of VAT. This has effectively required such parties to more carefully scrutinise the transactions to which they were a party.

The recent introduction of the strict liability corporate offences for failing to prevent fraud is another example of corporates being held accountable for fraud without the need for an attribution of dishonesty. This case adds to that impetus of shifting some of the burden of policing economic crime to corporates involved in the supply chain, given the difficulty of otherwise needing to demonstrate dishonesty. However, it remains the case that civil accessory liability claims (such as dishonest assistance) require unequivocal proof of dishonesty.