Type of Lawsuit: Beneficiary sued issuer for wrongful dishonor.

Parties: Plaintiff/Beneficiary- Industrial & Commercial Bank, Ltd., a Singapore bank that was a member of the United Overseas Bank Group ("UOB") (Counsel: Davinder Singh S.C, Hri Kumar and Sameer Advani) Defendant/Issuer- Banco Ambrosiano Veneto S.P.A, an Italian bank (Counsel: Yang Ing Loong and Ng Wee Chong). 52 Borrower/Applicant- Amarendra Nath Ghosh, in his capacity with Global Trade & Consultancy Pte Ltd.

Underlying Transaction: Correspondent banking facilities extended to Issuer's client.

LC: Two standby LCs for US$ 12,000,000 and US$ 3,000,000. Silent as to governing rules.

Decision: The High Court of Singapore, Tay Yong Kwang, J.C., entered judgment for the beneficiary.

Rationale: An authenticated S.W.I.F.T. message is binding on the sending bank, regardless of whether the authenticating test keys have been obtained fraudulently within the sending bank. The authorized recipient of a authenticated S.W.I.F.T. message has no further duty to ensure that message's authenticity.

Factual Summary: Beneficiary maintained a correspondent banking relationship with issuer, whose client, the applicant, requested facilities from the beneficiary that would be backed by standby LCs from the issuer. The beneficiary received an authenticated S.W.I.F.T. message from the issuer's Udine branch office, opening a standby LC in favor of the beneficiary for US$ 3,000,000 covering a revolving term loan to the applicant. It was the policy of the bank group to which the beneficiary belonged not to require confirmation of a branch bank's authority to issue LCs if both the issuer's branch and head office were located in G7 countries, as was the instance here. However, since the issuer was not listed among the group's pre-approved banks and LCs of the proposed amount were usually authorized by an issuer's head office, the beneficiary sent an authenticated S.W.I.F.T. message to the issuer's head office, inquiring whether the Udine branch had the authority to issue the LC. When no reply came, the beneficiary sent a second authenticated S.W.I.F.T. reminder. Two days later, an affirmative response was received via authenti-cated S.W.I.F.T. message from the Udine branch confirming its authority to issue the LC. Although the response indicated on its face that it emanated from the Udine branch, the officer of the beneficiary did not notice the origin of the message and the beneficiary proceeded to extend the credit facility. Several amendments were then made to the LC via authenticated S.W.I.F.T. messages between the beneficiary and the issuer's Udine branch. Three months later, while the initial LC was still outstanding, the beneficiary received an authenti-cated S.W.I.F.T. message from the Udine branch advising of the issuance of a second LC in favor of the beneficiary for US$ 4,000,000. By subsequent authenticated S.W.I.F.T. messages, this amount was amended to US$ 12,000,000. The beneficiary's officer again wanted to be "doubly sure" of the branch office's authority to issue such a LC, and sent a request via authenticated S.W.I.F.T. message to the issuer's head office for confirmation of the branch office's authority. When an affirmative response came from the Udine branch, the officer noticed the origin and checked with the banking group which informed him that the issuer's head office must have routed the request to its Udine branch for a reply. The officer was also reminded that under the internal guideline relating to G7 countries there was no need to verify the branch's authority. Subsequently, the issuer sent notice via faxes and S.W.I.F.T. messages to the beneficiary that the applicant was suspected of having perpetrated fraud, claiming that various standby LCs, including both.53 2001 LC CASE SUMMARIES issued in favor of the beneficiary, had been issued fraudulently. It appeared that the manager of the Operations Centre for Foreign Goods Department at the Udine branch, who did not have the authority to approve or manage applications for lines of credit, issue LCs, or perform acts related to such transactions was issued half of a S.W.I.F.T. test key, and had surreptitiously obtained the second half. This employee had sent all of the S.W.I.F.T. messages on his own, without authorization. Additionally, evidence indicated that the inquiries the beneficiary had directed to the issuer's head office regarding the branch office's authority to issue LCs had been immediately forwarded to the branch office by the issuer's communications department since the inquiries directly concerned it; it was doubtful that any senior officials at the issuer's head office ever saw the inquiries. When the beneficiary drew on the LCs, the issuer refused to pay. The beneficiary sued the issuer for payment in accordance with its correspondence banking agreement. Held: judgment for beneficiary.

Legal Analysis:

1.Authenticated S.W.I.F.T. Messages: Industry Standard: The beneficiary argued that it had no obligation to confirm independently authenticated S.W.I.F.T. messages because the system was predicated on the assumption that transmissions over the system beared the weight of authority from the sending bank. It contended that a recipient bank should not have to question the authenticity of transmissions that appeared on their face to be authenticated. The High Court agreed, noting that S.W.I.F.T. had become an advanced industry standard, an improvement over outdated "tested telexes" in terms of speed and security. "Two passwords held by different individuals are required for every SWIFT sic message. These external security measures coupled with the internal technical inviolability of the system ensure that only authentic and authorized communication enters the system and that such communication can be accessed or copied by only authorized persons at the destination. The authentication thus assures the users of the system that what one sees in the system has been introduced into it lawfully ... SWIFT sic messages have the legal effect of binding the sender bank according to the contents. The fact that a recipient bank may still wish to protect itself by doing checks on credit standing or other aspects does not detract from this position."

2. Authenticated S.W.I.F.T. Messages: Additional Authentication: The issuer argued that the beneficiary had a duty to follow up its request regarding the Udine branch's authority with "other means, such as the telephone, followed by a written request". The High Court rejected this argument, noting: "If SWIFT [sic] messages have to be further 'authenticated' by telephone enquiries, fax, or even 'snail mail', one wonders what all the security arrangements are about and what advantage in terms of speed the system offers over other means of communication ... Getting confirmation by the more traditional means of communication is also perhaps more fraught with opportunities for fraud. For instance, making a telephone call to seek confirmation would only be useful if the caller knows the person at the other end or recognizes his voice at least."

3. Authenticated S.W.I.F.T. Messages; Fraud; Issuance Fraud: The issuer also defended on the ground that the beneficiary had reasonable notice of fraud when inquiries sent to the head office were answered from the Udine branch. The High Court rejected this argument because "it is unrealistic to demand that recipient banks conduct a study of sender banks' organizational structure". The beneficiary had no way to know that its authenticated S.W.I.F.T. messages would be forwarded either. automatically or manually to the branch office. "In the circumstances, it was perfectly reasonable for the beneficiary to assume that issuer's Head Office had somehow directed or delegated the task of replying to the subject branch itself".

4. Insider Collusion: The issuer argued that an employee of the beneficiary was fraudulently involved with the LC transaction, which would excuse the issuer from liability. Evidence indicated that the employee was involved with managing the applicant's various accounts held by the beneficiary, that his name was included in the address line of the S.W.I.F.T. messages, and that he had been dismissed by the beneficiary for unprofessional conduct related to the management of the applicant's account. According to the court, his conduct was "questionable". However, the court also noted that, despite the appearance of a fraudulent relationship with the applicant, it was "clear" that the employee "had no role where the two standby LCs were concerned". His involvement with the LCs was relegated to "secretarial tasks" and "mere administrative acts" and did not rise to a level sufficient to preclude the issuer's liability.

Comment:Joseph Colleran, who appeared in the case as an expert for the beneficiary and informed DCW of this case, notes that this case re-establishes the principle that issuing banks must ensure the integrity of Test Keys and Signatures themselves. Other banks who receive apparently authenticated messages cannot be expected to bear the loss because of dishonesty at the issuing bank.

DCW Comment: This well reasoned opinion states an important rule, namely that a bank checks the apparent authenticity of a communication by the use of S.W.I.F.T. and that it may rely on such a message. It is no defense that a rogue employee of the issuer has obtained the key. While the S.W.I.F.T. system is not infallible, the result here is no different than had an employee listed in the correspondent bank signature book issued an unauthroized LC. By using S.W.I.F.T., the issuer bears the risk of misuse of its key by its employees. Banks must take responsibility for such communications appearing to be authorized and should insure against abuse.


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.