Over the past few years, the risk landscape for banks in Tanzania has been constantly evolving. Besides the deployment of advanced technologies by banks to detect fraud, the Bank of Tanzania (BOT) and the Financial Intelligence Unit (FIU) have issued a number of regulations, guidelines and circulars on fraud risk management for banks to implement the laws relating to anti-fraud and anti-money laundering measures.
A case in point is the issuance of the Banking and Financial Institutions (Internal Control and Internal Audit) Regulations 2014; the Guidelines for Verification of Customers' Identities; and the Anti-Money Laundering Guidelines for Banking Institutions.
However, despite all of the legislative, regulatory and supervisory efforts and technological advances in fraud detection, the risk of banking fraud—though minimized—has not been completely wiped out.
Bank customers and financial institutions still face a bruising set of fraud losses occasioned through card frauds; bad cheques; identity theft; misappropriation of funds from customers’ accounts; diversion of funds out of suspense accounts; and bogus collateral valuations and ghost loans.
Shareholders of banks want their boards of directors to, inter alia, maximize recoveries and prevent fraud from being committed against the banks. While some banks may have the ability to write-off any loses, small banks may find themselves in the BOT’s claws as a result of fraud.
Therefore, in this twenty-third part of our 30-part article series, we discuss the criminal and civil litigation options for dealing with banking fraud and offer some tips on how to choose the best option, taking into account the peculiarities of individual cases.
Criminal prosecutions serve the purpose of punishing the accused if found guilty by a competent court of law. And it’s trite law that the burden of proving the guilt of the accused rests on the prosecution (see, the Judgment of the Court of Appeal of Tanzania in Mariki & Others v Republic Criminal Appeal No. 289 of 2015 dated 27 October 2016).
Recent structural changes in Tanzania’s criminal prosecution machinery have aimed at delivering enhanced capacity for prosecutors to discharge their powers and duties including the conferment of independence and mandate over all criminal prosecutions to the National Prosecutions Service (NPS).
Some of the advantages of a criminal prosecution include reduced cost to the bank as compared to the cost of a civil proceeding; criminal investigators have wide powers to obtain information and to arrest suspects by executing search and arrest warrants; and the possibility of obtaining compensation under section 348(1) of the Criminal Procedure Act, Cap 20.
However, drawbacks include inability of the bank to set the investigation strategy and to join in the subsequent criminal prosecution conducted by the NPS. Bank officials may thus feel that they are outside of the process.
Civil proceedings provide compensation for harm done to a plaintiff. In these proceedings, there’s a lower burden of proof—the bank needs only to prove its case on a “balance of probabilities”. Moreover, in civil litigation, there is the opportunity to be compensated for damages and future loss of profits—which criminal courts are unlikely to award.
Responding to banking fraud via civil proceedings is costly because the plaintiff bank, initially, incurs the costs of investigation and proceedings, Advocate’s fees and court fees. Even though not as high as the standard of proof for criminal cases, civil proceedings response to banking fraud requires a high standard of proof. If the bank or its customer finally wins the case, the court may order the defendant to pay costs—but this is at the court’s discretion.
Since criminal and civil proceedings are not mutually exclusive, the other possibility is fighting on both the criminal and civil fronts. This is fraught with challenges. The defendant in civil proceedings may seek to stay the civil proceedings pending the outcome of the criminal proceedings, arguing that he/she will be prejudiced by defending the proceedings simultaneously.
Which way to go, whether civil or criminal or both, is hardly ever direct. Prudence requires affected bank customers and financial institutions to engage with their legal counsel on the best way to navigate these options and the interaction between them.
The BOT’s and FIU’s regulations and guidelines emphasize the need for strong fraud risk management practices. Banks should continually revamp their risk management frameworks and controls to nip fraud in the bud; at the same time, bank customers should be ever vigilant and precautious against suspicious activity.