Malaysia: The Role Of Banks In Fraud And Asset Recovery Litigation

Introduction

In the course of a fraud litigation, it is not uncommon for the plaintiff to seek the banks' assistance to preserve the fraudster's assets in the banks pending trial, or to provide relevant information and documents relating to bank accounts. However, banks often appear reticent about their readiness to render such assistance, having in the forefront of their minds the banking confidentiality rules as well as their duties to their customers. 

This Alert will discuss what banks can or cannot do in the face of fraud, and how they can help the plaintiff get the appropriate Orders without breaching their banking secrecy obligations.

Banking Secrecy

As a starting point, banks are subject to a statutory duty of secrecy under section 133 (1) of the Financial Services Act 2013 (“FSA”), which prohibits them or their officers from disclosing any document or information relating to the affairs or account of any customer to another person.

Any person found to be in breach of his duty of secrecy shall be liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding RM10,000,000.00 or to both, as provided under section 133 (4) of FSA.

However, there are circumstances where banks are permitted to disclose banking documents or information to a third party. These permitted disclosures are set out in Section 134 of FSA read together with Schedule 11, and include circumstances where disclosure is necessary to comply with an Order made by a Court not lower than a Sessions Court.   

Preservation and Tracing of Assets

Central to a fraud litigation is the importance of preserving the defendant's assets in the bank accounts and obtaining timely disclosure of the details of the alleged wrongdoings from the defendant's banks. As such, the plaintiff will invariably apply for injunctive reliefs and/or disclosure Orders against the defendant's banks at the early stages of trial.  

Interlocutory Injunction

The two most common types of injunction sought by the plaintiff are: (1) a Mareva injunction (which freezes the monies in the defendant's bank account(s)); and (2) a prohibitory injunction (which prohibits the defendant from disposing of his assets).

While an injunction is sought and ordered against the defendant, the subject matter of the injunction (especially a Mareva injunction) is more often than not the monies, shares or other assets held in a bank. In these circumstances, the plaintiff will extend a copy of the injunctive Order to the bank in question as an additional precautionary measure to prevent any disposal of assets pending the conclusion of fraud trial.

Once the bank becomes aware of the terms of the injunction, the bank owes the Court a duty to take reasonable care to ensure compliance of the Order by its customer (see the UK House of Lords decision of Customs and Excise Commissioners v Barclays Bank plc [2006] 3 WLR 1).

In this regard, it is imperative to take note of the Malaysian Federal Court decision of Monatech (M) Sdn Bhd v Jasa Keramat Sdn Bhd [2002] 4 CLJ 401, which held that any failure, refusal and/or omission to give effect to an injunction Order would be tantamount to an interference with the due administration of justice, which may give rise to a finding of contempt of Court.

Therefore, if a bank notified of the injunction knowingly assist in or allow a breach of the Order, for example by failing to stop the withdrawal of funds by its customer from his bank account during the lifespan of the injunction, it may be found guilty of contempt of Court.

Third-Party Disclosure Order

A plaintiff may also apply for a disclosure order against the defendant's banks (who are usually not parties to the fraud claim) under Order 24, rule 7A of the Rules of Court 2012.

This third-party disclosure Order is akin to the Norwich Pharmacal relief or Bankers' Trust Order, which allows the plaintiff to obtain documents and/or information relating to the bank accounts of the fraudsters and/or their associates. These documents and/or information are fundamental to any plaintiff's effort to trace the flow of funds, identify the recipients of the tainted funds, and pursue the necessary proprietary claims.

The legal test for a third-party discovery application is that the plaintiff must show a prima facie case of wrongdoings against the defendant, and that the documents and/or information sought will be relevant to the fraud claim.

When the bank is served with a third-party disclosure Order, it may legally disclose the information and/or documents relating to its customers' bank accounts sought by the plaintiff. The bank will not be in breach of its banking secrecy obligations because any disclosure for the purpose of “compliance with a court order made by a court not lower than a Sessions Court” is one of the permitted disclosures under section 134 and Schedule 11 of FSA.

On the contrary, if the bank fails or refuses or neglects to comply with the disclosure Order, it may run the risks of being cited for contempt of Court for breaching the Order to which the bank is a party.

In the event that the customer finds out about the disclosure and sues the bank for breach of its banking secrecy, the bank may raise this relevant permitted disclosure provision as a defence to the claim.

Gagging Order

In other common law jurisdictions such as Singapore and United Kingdom, the plaintiff will apply for a “gagging Order” alongside the aforementioned third-party disclosure Order. This is to prevent the bank from informing its customer that it has been served with a disclosure Order, hence obviating any potential issues of the customers finding out and taking actions to delay or frustrate the bank's disclosure. The gagging Order will be for a period of time to allow analysis of the information received, and can be extended on application.

The use of a gagging Order in the context of banking disclosure is yet to be seen and tested in the legal landscape of Malaysia. However, it will be a welcomed relief for banks served with a disclosure Order, as banks can rely on it as a valid justification for not being able to inform their customers about the relevant disclosure.

Concluding Remarks

Based on the above, it is clear that banks can play a pivotal role in helping the plaintiff to a fraud claim in his efforts to preserve, trace and recover the defrauded assets from the defendant. The permitted disclosures set out in FSA also appear to recognize the banks' role in this regard, and provide the necessary qualifications to the banking secrecy when there is evidence of a criminal offence or wrongdoing such as fraud taking place.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.