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Factual Summary: To import necessary goods, during hard economic times, the Venezuelan government established a program (RECADI) to encourage imports by offering a preferential exchange rate for U.S. Dollars. The plaintiff Venezuelan bank issued letters of credit to facilitate imports under the RECADI program. Two non-bank employees paid bribes to the issuer's unsupervised employee in charge of the L/C department to approve the payment on L/C's against fraudulent documents that represented non-existent goods. The bank would then obtain reimbursement from the government. The government soon discovered the fraudulent drawings and refused to reimburse the issuer. As a result, the issuer lost over $1,618,000. While the fraud continued, however, the bank had collected its usual fees for issuance of the L/Cs.

To facilitate his fraudulent scheme, the issuer's employee deposited funds in several accounts at a Swiss banking institution in Miami. An employee at the Swiss bank soon learned that the account holder had been accused of fraud. She informed her bank, and it decided to tell the customer to take his business elsewhere. In doing so, they referred him to another bank. That bank opened up an account at the Swiss bank in its own name, but with the money that the fraudster had withdrawn from the Swiss bank.

The issuer then learned of the Miami bank accounts and obtained a temporary injunction against transfers from the accounts and sent writs of garnishment to fifty Miami banks. The Swiss bank did not inform the issuer of the fraudster's interest in the other bank's account at their bank about which it claimed not to know. Consequently, the money was not garnished.

The issuer then sued the Swiss bank and its employee for their alleged roles in the money laundering conspiracy. The suit was for $1.6 million (the issuer's total losses under the scheme). The jury found for the defendants based on the equitable defenses of estoppel and in pari delicto. On appeal, affirmed.

Legal Analysis:

1. Equitable Defenses: The appellate court ruled that the evidence showed that the defendants had not instigated or become involved in the fraud, but had only provided banking services to a fraudster. While there may have been some question about the Swiss bank employee's culpability, the jury had awarded only very small punitive damages against her and no damages against the Swiss bank. This finding of minimal to no culpability was clearly supported by the evidence. Thus, the jury's finding that the issuer was at least as culpable as the Swiss bank was unassailable. Moreover, it was within the trial judge's discretion to adopt the jury's advisory findings on the equitable defenses.

Interestingly, the issuer argued that it had fired its culpable employees, who had clearly acted beyond the scope of their employment. Thus, the issuer argued, it was a victim, not a culpable party. The court rejected this theory by noting that the main fraudster was the bank's second highest officer. The court also noted that the bank had benefitted from collecting fees on the L/Cs during the life of the fraud.

The court noted its awareness that its approach put the onus of avoiding future frauds on the employer of the fraudster. The opinion stated that the banks would have to be more vigilant to avoid becoming victims of their own officers.

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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.