The failure to obtain due diligence information which would have revealed that a firm was being used as an instrument of crime was the key factor in the decision to hold them liable to compensate the original victim for the loss suffered as a result of the fraud. This was the decision in Armstrong DLW GMBH v Winnington Networks Ltd [2012] EWHC 10 (Ch).
The case involved the trade of stolen carbon credits worth over 250,000 euros. Essentially the fraudsters utilised a phishing email to obtain the username and password to the victim’s account (Armstrong) in the German registry. They then stole the credits and traded them to another company (Winnington) who on traded them the same day.
The recipient company had received a cold call from the fraudsters and had only obtained vague general information before agreeing to commence client onboarding. The initial contact was made via a free web-based email account, there was no company information on the fraudsters letters and there was no proprietary website for the purported company. Winnington asked for specific client due diligence information on a number of occasions but did not receive the information. The stated aim of the requests were to establish that the firm would actual receive the carbon credits which they had agreed to buy, to prevent money laundering and to prevent fraud.
Despite repeated non-receipt of the client due diligence information Winnington took delivery of the carbon credits, paid for them and on traded the credits to a regular client. After the trade was completed, the staff at Winnington continued to chase the fraudsters for additional due diligence material but were unsuccessful in obtaining the same.
The court held that the fraudster became a constructive trustee of the carbon credits and the victim’s claim lay in receipt of trusts property against Winnington. The court found that the degree of knowledge of Winnington in light of the significantly deficient client due diligence information was such as to make their receipt unconscionable and they were therefore liable. In the alternative, the court held that if beneficial and legal ownership of the title to the carbon credits had not been separated, then Winnington was sufficiently on notice of potential fraud or impropriety as to be liable for a claim for proprietary restitution.