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“Trusting” correspondent banks: Welcome clarification for offshore banking and finance

The recent decision of the English Court of Appeal in First City Monument Bank Plc v Zumax Nigeria Ltd confirms the common sense position that an international transfer of funds via a correspondent bank does not give rise to trust.

A correspondent bank provides services to other financial institutions. A bank may use a correspondent bank to service transactions originating in a foreign country where it is not physically present. An international funds transfer will usually require the services of at least one correspondent bank. Correspondent banks are an everyday feature of banking in international financial jurisdictions offshore such as the Cayman Islands.  

In First City, the claimant, a Nigerian engineering company, was a customer of the defendant, a Nigerian bank. The claimant received payment for its services into a US Dollar denominated account held with a London bank and would, from time to time, transfer funds from this account to its Nigerian Naira denominated account held with the defendant bank in Nigeria. To facilitate receipt of these funds, the defendant bank held an account with a London based ‘correspondent’ bank. The transfer instructions to the correspondent bank would name the defendant bank as beneficiary of the transfer, but noted that the transfer was for further or final credit to the claimant. The claimant alleged that it had not received some of the transfers, and sought a declaration that the defendant bank was liable to account to the claimant “as trustee” of the missing funds. The argument that the defendant bank was a trustee was crucial to the claim because the limitations period for a claim founded on breach of contract had expired.  

The Court of Appeal overturned the first instance finding that a trust was created by the transfer instructions to the correspondent bank by reference to the well-known principles relating to formation of trusts, and reinforced in this conclusion by the often repeated warning in the authorities against “the wholesale importation into commercial law of equitable principles inconsistent with the certainty and speed which are essential requirements for the orderly conduct of business affairs”.

This conclusion represents a welcome return to the status quo in the offshore world of banking and finance. The well and long established principle that the basic banker-customer relationship is that of a contractual debtor and creditor, not of a trustee and beneficiary, is fundamental to the conduct of international banking. If a trust was created on the facts of this case, it is difficult to see why a trust would not be created in almost every other international money transfer facilitated with a correspondent bank and with instructions identifying the intended recipient of the funds.

“Trusting” correspondent banks: Welcome clarification for offshore banking and finance

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