UnionBank loses credit card fraud case
THE Privy Council has upheld a ruling by Jamaica’s Appeal Court that freed former banker, Dalton Yap, of the obligation to repay US$106.2 million that was lost by the now defunct CitizensBank on credit card transactions when Yap was head of technology and operations at the bank.
In 1997, Supreme Court judge, Seymour Panton, found Yap liable for the loss after Citizens sued him for damages, claiming that he had maintained or reinstated credit accounts which had been ordered cut, thereby breaching his employment contract.
But the decision was over-turned by the Jamaican Appeal Court three years later and was upheld by the Privy Council — the island’s court of last resort — in a ruling handed down on Tuesday.
In their verdict, the London-based law lords agreed with the court of appeal that Justice Panton had wrongly concluded that a July 1993 memo to Yap instructing the termination of a number of suspect accounts amounted to a policy by the bank not to acquire any more telemarketing merchants as customers.
The UK jurists also held that Justice Panton erred in not taking into account a later memo by one of the bank’s senior executives outlining the risk cover for taking on Worldwide Marketing — the company by which it was eventually burnt — as a client. The Privy Council held that the fact of the memo and a prior meeting of executives to look at the possibility was “totally inconsistent with a fixed policy that the bank was to acquire no more telemarketing merchants”.
“Both mistakes critically affected the reasoning which led to (Justice Panton’s) conclusion that the defendant had breached his contract of employment with the bank…,” the Privy Council argued. “This is one of those exceptional cases where the appellate court was entitled, indeed bound, to interfere with his decision on a matter of fact.”
The loss of what at the time was in the region of J$2.5 billion was the kind of hit that contributed to the eventual collapse of CitizensBank under a mountain of bad debts, its take-over by the Government and absorption into what became UnionBank, the entity that took the case to the Privy Council.
The bank’s claim against Yap was that after Visa, the credit card company, had pointed to the likelihood of fraud being committed on transactions involving Worldwide Marketing, Yap failed to carry out instructions to cut its account.
They also claimed that Yap, having cut another company, LMP Marketing, which Visa also suspected of being involved, quickly reinstated the account, in breach of the terms of his contract.
The legal issues apart, the court case suggested a generally slow implementation of decisions taken to safeguard the bank and seeming exasperation on the part of Visa and Mastercard officials at the pace with which CitizensBank’s executives responded to the complaints of possible credit fraud by clients.
For instance, while Yap in a July 7, 1993 memo advised a colleague that LMP’s account had been terminated a day earlier, Visa detected that 145 transactions had been processed by CitizensBank on behalf of the company.
It was this that caused the claim that Yap had reinstated the account, a claim he denied.
In fact, during the trial it was suggested that “a second merchant account” had been opened for LMP, but Yap insisted that he knew nothing of the circumstances under which it was opened and its existence was never fully explained.
Justice Panton had held that in effect Yap had re-opened the LMP account, but the Privy Council said that there was no evidence to contradict that it was “a second account” as claimed by a corresponding bank for LMP.
“On the other hand, what material difference, if any, there would be between opening a new account and reopening an existing account was not explored in evidence,” the Privy Council noted.
In another example of CitizensBank’s tardiness in implementing decisions aimed at protecting it against credit card fraud, an internal memo on July 21 from the bank’s then managing director, Lloyd Wiggan, noted that the accounts of a number of suspect companies — Travel Connection, Floral Exchange and LMP Marketing — were “still opened” even though no merchant transactions were said to have been processed through the accounts since July 2.
In the critical decision shortly afterwards to open the account for Worldwide Marketing, an internal memo appeared to place as a condition that the processing agent cover the expected 180-day exposure with “a bank guarantee through a standby letter of credit for the full amount of all potential risk”.
Both the local Appeal Court and the Privy Council said that this indicated an approval to open an account for “Worldwide Marketing provided that there were the proper safeguards of the kind suggested”.
But the account was opened without these safeguards being in place and the Privy Council held that responsibility for securing them, based on the structure of CitizensBank’s credit card operation, would have been with the marketing department rather than Yap’s unit.
Added the Privy Council: “How the defendant came to open the account without those safeguards being in place does not emerge from the evidence. Nor do their Lordships pause to consider whether opening the account before being told that the safeguards were in place would itself have constituted a breach of the defendant’s contract.
“Amidst a welter of allegations of wrongdoing in the statement of claim, that was never suggested. What matters is that the defendant opened the account, not as a defiant stroke of his own, but as a business move that had been discussed and approved in principle by other members of the management team. Again, that is what their Lordships would expect, since the defendant, as a responsible official of the Bank, would have had neither motive nor incentive to open the account for any other purpose. As the Court of Appeal observed, if opening the account had led to profits, the Bank would have been the beneficiary and the defendant would have been hailed as a hero. As it happens, the move turned out badly, but it did not, for that reason, amount to a breach of the appellant’s contract of employment.”