A Bank’s Duty When Opening an Account

Do banks owe people who are not yet their customers any responsibilities, which may be called a duty of care? A recent decision made by the Ontario Superior Court of Justice (“ONSC”) suggests that yes, they do.

A 2021 ONSC case titled McDonald and Dickson v TD Bank, 2021 ONSC 3872 (“McDonald”), states that a bank has a duty to any prospective customers to complete research, which is called due diligence before opening an account for that customer. In McDonald, the ONSC stated that while there were not a lot of cases looking at a bank’s duties when a prospective customer wants to open a bank account, the Canadian Court has decided that banks must verify the identity of the prospective customer and ascertain who will be the authorized account signatories (paragraph 151).

Practically speaking, this means that banks should set up internal protocols which are triggered anytime someone wants to open a bank account to verify the identity of person, as well as make sure they know which people can sign off on transactions on behalf of the account holder. In McDonald, the ONSC noted that not having proper signing procedures puts a bank’s customer’s funds at risk of being withdrawn by an unauthorized person (paragraph 151).

In the case of a corporate or company bank account, a bank’s duty to do due diligence likely means that it also needs to make sure the person at the bank is authorized to open an account on behalf of the corporation.

The ONSC in McDonald went on to reference a 2020 case from the Court of the Queen’s Bench of Alberta (“ABQB”), Toronto Dominion Bank v Whitford, 2020 ABQB 802 (“Whitford”). In Whitford, an unauthorized person fraudulently got a mortgage with Toronto-Dominion Bank (“TD”) under the Defendant’s name (paragraph 1). The mortgage eventually fell into default, and TD tried to sue the Defendant for the loss it suffered from the default (paragraph 2). In Whitford, the ABQB decided that the banker responsible for this transaction approved the mortgage and opened a chequing account for the Defendant without ever meeting him or verifying the identification presented to her (paragraphs 21-22). The ABQB decided that TD would be held responsible for its employee’s negligence, and therefore TD could not enforce the mortgage against the Defendant (paragraph 252).

A Bank’s Duties After Opening the Account

A bank’s duties do not stop once an account is opened. In fact, a bank has arguably more duties to the accountholder once an account has been opened.

The ONSC in McDonald stated that once a person opens an account with a bank, the bank must “exercise reasonable care and skill in performing all banking services with its customer” (paragraph 152). This means that if the bank thinks there is suspicious or questionable activity on a bank account, it must investigate to determine if someone is trying to use the bank’s facilities to commit fraud. This is often when fraud litigation lawyers get involved.

Banks have begun implementing measures to attempt to stop fraud in its tracks. One such bank is TD, which now requires customers to sign a form before they can make a large cash withdrawal. Their form confirms that TD warned the customer about schemes where fraudsters ask victims for cash deposits. One demographic this form seeks to protect is senior account holders, who may be more susceptible to such scams. Walker Law’s Tanya Walker spoke on CTV News regarding the usefulness of these forms, and whether they are enough to protect banks from liability if they accidentally facilitate a scam. Tanya opined that while these forms are a “great first step” to alert account holders to potential scams, a bank may have trouble relying on them if the bank cannot show that customer who signed the form understood what the form meant.

Tags: fraud litigation

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