A court case has revealed how a bank’s blunders allowed employees of an agri-trade company to swindle cash from their employer using a fake account, raising questions on its due diligence credentials.
It all started in 2014 when Jumbo Commodities Limited, a company that trades and distributes agricultural commodities, received cheques worth Sh2,001,900 from its customers to be deposited at I&M Bank.
However, two employees of the company, who have since been convicted, fraudulently opened a bank account at Equatorial Commercial Bank in the name of Jumbo Commodities, using false registration details, and deposited the cheques there.
The employees, Vincent Ng’eno Cheruiyot and Jackson Kimeu, were prosecuted and convicted of fraud and misappropriation of funds.
To recover the lost money, Jumbo Commodities sued both the fraudsters and the bank, arguing that Equatorial was negligent in permitting the fraudulent account to be opened and operated.
The Milimani Commercial Court magistrate agreed and ruled in the company’s favour, a decision that prompted the bank to appeal to the High Court.
In the High Court, Equatorial argued that the magistrate’s court had erred because there was insufficient evidence that the bank had been negligent. The lender argued that it had acted in good faith and followed all necessary protocols in allowing the account to be opened. It claimed that the alleged financial loss had not been proven to the required legal standard.
Justice Benjamin Njoroge dismissed the appeal, saying the bank had failed to exercise due diligence in opening the account for the employees.
In particular, it failed to verify the legitimacy of the duplicate company name through an official search at the Registrar of Companies.
“A bank must exercise reasonable diligence and take the necessary precautions by making proper inquiries to ensure that the holders of accounts are not imposters. It was incumbent upon the appellant (the bank) to perform an official search at the Registrar of Companies prior to opening the account for the subject entity” the judge said.
“Such an official search would have enabled the appellant to confirm the legitimacy, ownership, and governance details of Jumbo Commodities Limited, the entity presented by the 2nd and 3rd respondents. In place of the official search, the Appellant relied on a letter from Gathaiya & Associates Advocates. It goes without saying that an official search is a critical component of the bank’s compliance with regulatory requirements and industry best practices,” Justice Njoroge said in the ruling on Thursday.
The judge went on to point out other inconsistencies in the bank’s records, saying even the Certificate of Incorporation submitted by the fraudsters had two different registration numbers.
“For instance, and as pointed out by the Trial Court the Certificate of Incorporation showed certificate no. CPR/2009/14412 while the letter by Gathaiya & Associates Advocates showed no. CPR/2014/168128. Further, the incorporation dates were two 25th November 2009 and 17th November 2014.” Justice Njoroge said.
The court added that the fraudulent account was opened just days after the fake company’s registration. Yet, the bank accepted the account without demanding audited financial statements or proof of legitimate business operations.
“The bank clearly did not exhaust its exercise of due diligence. Thus, had the bank been diligent, it could have detected the anomalies early enough and not proceeded with opening the impugned bank account…The appeal is dismissed in its entirety,” Justice Njoroge said.
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