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RBC’s $22m payment suspicion ‘reasonable’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Court of Appeal yesterday ruled it was “reasonable” for Royal Bank of Canada (RBC) to find that $21.957m paid to a Bahamian businessman by a Slovakian he has never met for investment in his sand mining venture was “suspicious”.

The three justices, in a unanimous verdict, dismissed Larry A. Ferguson’s appeal against the Supreme Court’s initial ruling which found that the Canadian-owned bank was more than justified in refusing to process and clear a sum that was paid to him via 23 VISA transactions that exceeded the card’s limit each time.

Appeal Justice Indra Charles, in her ruling, said all 23 payments by Boris Plavala, a Slovak citizen, were “force posted” - meaning that the receiving party bypasses the card company’s normal authorisation process by taking the point-of-sale facility that processes such payments offline. The recipient then processes the transaction via a code obtained from his/her bank.

RBC subsequently flagged the payments to Mr Ferguson and his companies as “suspicious transactions”, and placed a hold on the accounts. VISA also declined to settle the payments, all of which were for $990,000 each time bar one that was for $168,000, because they exceeded the card’s individual transaction limit, while the issuing institution, ZUNO Bank, asserted that all transfers were “fraudulent”.

Ultimately, RBC reversed the payments to Mr Ferguson, who initiated legal action as a result. Noting that he had been an RBC client since October 27, 2010, appeal justice Charles wrote: “On or about October 18, 2016, the appellant handed a letter to the respondent [RBC] alleging that funds in the amount of 350m Euros would be immediately transferred to his accounts.

“On or about October 20, 2016, the sum of $20.958m was credited to his Coastal Winds account arising from a VISA credit card transaction and $990,000 was also credited to the account of Store Away by the same method.” Coastal Winds was a vacation rental business operated by Mr Ferguson, while Store Away was another entity in which he was a shareholder.

“The funds were facilitated by 23 force-posted transactions from the VISA card of Boris Plavala, whom the appellant had never met but who had agreed to provide him with the funds without him having to repay Mr Plavala,” appeal justice Charles added. “A force-posted transaction occurs where a merchant processes a credit card or a debit card offline by use of a code obtained from the merchant’s bank. This enables the merchant to bypass the normal authorisation process.

“Twenty-one of these transactions were in the amount of $990,000 each and the 22nd was in the amount of $168,000. A separate transaction was also made to the Store Away account for $990,000.” This unusual activity, and the sums involved, alerted RBC executives.

“The transactions in both accounts were flagged by RBC Financial (Caribbean) Ltd’s Fraud Monitoring Unit in Trinidad & Tobago, which monitors merchant accounts operated within all RBC Caribbean jurisdictions for suspicious activity. As a result, a hold was placed on the accounts. On or about 20 October 2016, the appellant attempted to access the accounts and was advised of the hold,” appeal justice Charles added.

“In addition to the accounts being flagged for suspicious activity, VISA also declined to settle the transactions on the basis that the amounts of the transactions exceeded the card’s limit for individual transactions. Further, the respondent was later contacted by the credit card issuer ZUNO bank and informed that the transactions in question were fraudulent.”

Mr Ferguson, though, argued that because the funds had been posted to his accounts they had “passed RBC’s investigatory ‘firewall’ confirming the legitimacy of the transmissions and, therefore, the respondent was obligated to immediately pay the funds to him upon request”.

However, RBC’s stance “is that it never received the funds from VISA to settle the transactions which it advanced to the appellant’s accounts. Consequently, the funds which were advanced to the accounts were reversed”. Unable to reconcile their differences, Mr Ferguson initiated legal action on November 8, 2016, but his arguments were dismissed by Justice Diane Stewart at the Supreme Court level.

Central to Mr Ferguson’s appeal was his assertion that, once the funds were credited to his accounts, “he had an automatic right” to them and RBC did not have the ability to reverse the transactions even though VISA had refused to settle the payments.

“Returning to the pivotal issue, the gravamen of the appellant’s case is that once the funds were credited to his accounts, he had a contractual right to the funds upon his demand and the respondent did not have the ability to debit the accounts. Further, it matters not whether VISA did not honour the transactions,” appeal justice Charles wrote.

“As the respondent [RBC] properly submits, there was clear evidence at the trial, which the judge accepted, that the nature of the transactions being offline transactions meant that such transactions by-passed the standard approval process and were ‘force-posted’.

“In other words, they were approved by the person seeking to post the transactions and not by VISA. This process required a subsequent verification from VISA which did not occur. Therefore, the judge was correct to categorise these transactions as ‘attempts’ and not ‘approved’ as the only entity that could have approved them was VISA and it did not.”

The Court of Appeal found that Mr Ferguson, who was represented by attorneys Keod Smith and Carlton Martin, has “missed the point” because no funds were ever deposited in his accounts. Instead, RBC had made an advance to him but VISA subsequently never settled the card payments.

“The absurdity of the appellant’s argument that once the funds were credited to the accounts, the respondent did not have the ability to debit the accounts regardless of whether VISA honoured or did not honour the transactions, was underscored during oral submissions,” appeal justice Charles wrote.

This saw a lengthy exchange between Sir Michael Barnett, Court of Appeal president, and Mr Smith over whether a financial institution can debit a cheque posted to a customer’s account if it bounces because there are insufficient funds to clear it.

“We agree... that the respondent bank has an unquestioned duty to prevent the use of funds deposited to the account of a customer where it is aware that that customer has no legitimate claim to those funds,” appeal justice Charles wrote.

“In the instant case, the funds in question, being an advance, were in fact the respondent’s own funds but even if that were not the case, the respondent, being aware of a report of suspicious transactions and potential fraud was under an obligation to take steps to prevent harm to third parties.”

Mr Ferguson also sought to appeal on the grounds that the Supreme Court erred in finding Mr Plavala had to be called as a witness given that “the funds were sent from ZUNO bank by Mr Plavala as an investment in his sand mining business.

“The Judge found that Mr Plavala was not called as a witness to support his contention that he had in fact sent the funds as a non-obligatory investment. She further found that the Central Bank confirmed by letter that Mr Plavala had not obtained any approval to invest in The Bahamas nor did the appellant obtain approval to borrow in a foreign currency,” appeal justice Charles added.

“What the judge said... is that it would have been beneficial to the appellant’s case for him to set out any agreements between him and Mr Plavala since no Central Bank approval had been obtained by Mr Plavala, a non-Bahamian, to invest in The Bahamas. Later on, the judge stated that all of those omissions supported the finding of the respondent that the transactions were suspicious, which she accepted as reasonable. We do, too......

“It is the appellant who alleges that Mr Plavala, whom he had never met, transmitted millions of dollars to him. There was no approval from Central Bank for a non-Bahamian to do so. The judge was concerned that there was no evidence that Mr Plavala and the appellant were engaged in any ongoing business relationship. She accepted that the scenario could objectively have been viewed as suspicious....”

The Court of Appeal dismissed Mr Ferguson’s claim for “not having advanced any cogent or rational grounds of appeal”.