Financial institutions have traditionally treated fraud as a matter of operational risk and regulatory compliance. But in a world where they are becoming increasingly involved in fraud litigation, that mindset needs to change.
With the rise of online and mobile banking as well as AI and cryptocurrency, fraud has become easier to commit, more globalised and harder to trace.
That means banks must now, more than ever, be on the front foot in preventing fraud and managing the legal risk that follows.
It is no surprise that fraud disputes involving financial institutions are increasing. Banks sit at the centre of global capital flows and often find themselves involved in claims as intermediaries, facilitators, primary wrongdoers or even victims.
They have to retain evidence, and they normally have deep pockets, making them natural targets for claimants seeking recovery, even if they were not central actors — although the days when financial institutions might be assumed to be innocent are long gone.
That particularly matters in England, which remains the forum of choice for litigants across the world and is well equipped to deal with large scale cross-border fraud cases.
The English courts are admired for their transparency, even-handedness and judicial quality. They can deploy powerful interim measures, including worldwide freezing injunctions, to help victims trace assets, identify wrongdoers and maximise recoveries, Where there is a connection to England, whether through the banking system, the
movement of funds or contractual arrangements, the courts have shown themselves more willing than many rival jurisdictions to hear cross-border fraud claims, even where the underlying law to be applied is not English law.
The future of fraud
The shape of these claims, however, is shifting, and banks need to keep up.
Technology has transformed the scale and international reach of fraud. Cryptocurrency has made it easier to launder money and move assets across jurisdictions almost instantly, often with a high degree of anonymity.
Generative AI is making impersonation fraud and social engineering attacks more convincing and far quicker to carry out. Organised fraud networks now operate across
multiple markets, with a level of co-ordination and technical capability that would have seemed extraordinary only a few years ago.
Institutions that do not adapt quickly enough to ensure they are not facilitating such frauds may well find themselves facing legal action. This leaves them in the unenviable position of having to maintain seamless global transactions while putting in place protections robust enough to guard against evermore sophisticated fraudsters including granting proprietary injunctions over crypto assets and disclosure orders against crypto exchanges.
Another important factor in the surge in fraud litigation against banks has been the rise of litigation funding — a trend the government is encouraging through the introduction of new legislation.
Claims that might once have been considered too costly or risky are now being financed by sophisticated third-party funders, usually backed by insurance against adverse costs. By reducing the financial risks of litigating, funding has increased the incentive for individuals, insolvency practitioners and liquidators to sue. Corporates can use litigation funding to hedge their exposure without affecting their balance sheet or cash flow.
Litigation funding has also driven the growth of large scale group claims, in cases where claimants might once have lacked the resources or co-ordination to proceed collectively. Group investor mis-selling and securities actions are now well established in this country and have led to substantial payouts.
Rules that allow claimants to bring fraud claims outside the usual time limits may increase banks’ exposure to historical activities that took place years or even decades ago.
In practice, this presents financial institutions with multiple challenges.
Fraud now spans more jurisdictions and, thanks to AI and cryptocurrency, is more scalable and harder to detect. When litigation does arise, funded opponents have the ability and will to sustain years of complex proceedings, with all the reputational risk that entails. Cases in which banks might once have benefited from superior resources can now be pursued all the way to trial.
The upshot is that the dynamics of fraud disputes and the strategic choices facing financial institutions have fundamentally altered. Fraud is no longer a narrow compliance problem; it is now a legal risk that reaches into every boardroom.
This article was originally published on the FT Adviser website and can be accessed at: https://www.ftadviser.com/content/51f3718e-9644-4f05-96d7-5d1060dbe834
