Martin Kenney, CFE
The Allen Stanford Ponzi scheme is notorious for many reasons. Stanford’s $7 billion scam, affecting upward of 18,000 victims, was the second largest Ponzi scheme in history, eclipsed only by the huge fraud run by the late Bernie Madoff, who defrauded thousands of investors out of $17.5 billion.
The formerly bankrupt Stanford is currently serving a 110-year sentence in the Coleman II Supermax federal prison in Florida, after living a life of luxury in the Caribbean for two decades off the proceeds of his crime.
I act as co-general counsel for the liquidators of Stanford International Bank – SIB – the Antiguan offshore bank formerly controlled by Allen Stanford. I have therefore been keeping an eye on unfolding events, which include a major court case which has taken a decade to come to trial and has just delivered a judgment in Canada.
Stanford International Bank (now in liquidation) had been suing the Toronto-Dominion Bank (TD Bank) in Canada, for alleged negligence. SIB claimed that TD Bank could have saved Stanford investors $4.5 billion had the bank upheld the standards expected of a reasonable bank in the 1991-2009 time frame, when TD operated a U.S.-dollar correspondent bank account for Stanford’s offshore bank, through which more than $10 billion flowed, becoming one of TD’s highest earning correspondent accounts.
Live testimony in the trial ended in March after three months of hearings on Zoom, followed by closing submissions at the end of April. Unfortunately for SIB, and the many thousands of Stanford’s victims still waiting for payouts on their lost savings, Justice Barbara Conway dismissed our side’s claims, ruling that TD did not owe a duty of care to SIB to protect it from ‘insider abuse,’ and even if a duty had existed then TD did not fall below the standard of care of a ‘reasonable banker’. Had she found that duty was breached, TD would have been exposed to a significant damages awards, she wrote, ranging between $1.1 and 4.3 billion.
The joint liquidators of SIB are now considering the possibility of an appeal and TD continues to face separate legal action in the US.
Regardless of the outcome, this remains an important case. Banks and other financial institutions will realize the great importance of “know your customer” (KYC) and due diligence. Only meaningful due diligence intended to ferret out and act appropriately in the face of high risk will satisfy the bank’s duty of care. The banks’ facilitation of economic crime risk management is of central importance.
The Stanford case, like all Ponzi schemes, also has a human face. Most of the victims tend to be retirees, people who had hoped to invest savings and reap returns that would see them safely through retirement. When pensioners lose their savings to a fraudster, the effects can be devastating and life changing. This is no longer simply about their return on the dollar (or lack of it). This is a matter of the victims’ livelihood.
Like TD Bank, Société Generale (Geneva) – Soc Gen – has found itself on the receiving end of a similar lawsuit connected to the Stanford affair. In November it was reprimanded by a Swiss appellate court and ordered to give up $150 million deposited by Allen Stanford that it had fought for nearly a decade to keep. The court ruled that Soc Gen had failed to undertake reasonable due diligence before accepting Stanford’s money (the bank is also being sued for another $510 million in damages by the liquidators of SIB, in a separate case).
Effectively in these civil cases, the banks stand accused of failing to adequately investigate and manage the risk of the possibility that they were enabling what turned out to be a fraud of epic proportions.
This goes back to the notion I floated earlier, that the days of lax due diligence and shortcomings in KYC have long disappeared. In fairness, since the Stanford fraud came to light in 2009, such processes have improved, but this is no time for financial institutions and other facilitators of fraud to rest on their laurels.
Professional enablers such as banks, lawyers or company formation agents, understandably aim to earn profit. But from a fraud victim’s perspective, they can seem to disregard the economic pain and dislocation when things go wrong, and which can have a devastating impact on people’s lives.
The principal narrative radiating from these types of facilitation liability cases against banks, though, is that being sued for significant sums may impact profits and adversely affect the reputational capital of an institution.
Meanwhile, the call for more robust risk management practices by banks in the fight against fraud is only going to get louder and louder as the years march by. That’s why in the battle against corruption, it’s time actions were matched to words.
Martin Kenney is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI, focused on multi-jurisdictional fraud and grand corruption cases.
SOURCE: ACFE Insights – A Publication of the Association of Certified Fraud Examiners