Ponzi Banking: The Law and Psychology of Banks that Service Financial Misconduct

By Martin Kenney and Alexander Stein

“You can’t run a Ponzi scheme without a bank”

Ponzi schemes are a type of investment fraud. Investors are promised high returns with limited risk. Operators of the scheme use funds collected from new investors to pay existing investors, rather than investing the funds as promised. To maintain the illusion of sustainability, the investment vehicle, which is a fiction, produces fake or misleading financial statements that trick credulous investors to make constant capital injections by misrepresenting what the fund is doing and how well it is performing. In the investment world, there is an asymmetry of information that requires investors to trust the funds to provide an accurate picture of what is happening. The prudent investor, however diligent, is powerless against those who lie outright because there is little to no ability to verify the factual accuracy of the information provided.

In either case, when capital demands from investors exiting the scheme exceed capital injection by new investors the schemes collapse. Investors who did not withdraw funds prior to the onset of insolvency, risk incurring substantial loss.

Where a Ponzi scheme collapses, the fund operators may be one potential litigation target. However, the scheme’s investors often have difficulty recovering from the operators who will typically have dissipated the investors’ assets, leaving the schemes insufficiently capitalized to satisfy judgments. By contrast, banks are typically sufficiently capitalized to satisfy judgments. However, the process of recovering from banks in such circumstances is complex and often fruitless. One common reason relates to the challenges in establishing causal links or sufficient legal proximity between the financial institution’s services and the fraudster’s abuses of them.

Towards unlocking and redressing that complex issue, we combine legal and psychological analyses to provide an integrated, two-fold interdisciplinary and multijurisdictional analysis. Our approach concisely traces the historical applications of psychological theories and understandings about the mind and aspects of character and mental states into law to enable triers of fact and law to determine a defendant’s state of mind. For instance, concepts of the mind such as intent, knowledge, awareness, truthfulness, recklessness, and disregard for consequences may form part of the mental element assessed by a court in determining civil liability for wrongdoing.

How are Courts responding to claims of victims of fraud against banks for damages sounded in the unintentional tort of negligence? This is where claims are pled in response to careless conduct which falls below the standard of care expected of a reasonable bank.

Banks rarely incur civil liability for providing routine banking services that, for a variety of reasons, functionally enable Ponzi schemes and other financial misconduct. Why banks facilitate financial misconduct ranges across a spectrum of explanations including: (i) the fact that an investment fund that is a client of a well-known, credible bank creates an edifice of probity thus facilitating a natural imprimatur of legitimacy to entice victims to part with their money, (ii) inadequate risk awareness training of bank employees, (iii) weak or ineffective KYC and other internal bank compliance procedures and controls, and (iv)  incentive programs that deliberately or unwittingly motivate bank employees to turn a blind eye to red flags of risk. Victims of fraud face substantial barriers in stating a claim against banks in cases where, in particular, banks facilitate fraudulent schemes or are careless or reckless in their conduct.

How can a financial institution be found liable in negligence or for committing an intentional wrong (like dishonest assistance in the breach of a fiduciary duty), for failing to prevent fraud by a customer or shareholder? What’s needed for victims to succeed in pursuing redress from enabling banks? What lessons can be learned both from cases in which (a) victims succeed and (b) where they fail to obtain judgment in their favour?  To answer these questions, we examine the legal framework applicable to liability for a bank that serviced major financial misconduct in the context of a leading judgment in Canada[1].

We are well aware that civil and criminal law are quite different legal frameworks. And, moreover, that different jurisdictions impose liability on the bases of differing understandings and definitions of mind states and legal procedures. That this can generate confusion is to one of our points here. Inconsistencies and conflicts of these sorts between and among jurisdictions is typical. They cannot be avoided and must be adroitly contended with in multijurisdictional cross-border asset recovery work.

Developing answers drew us into recognizing that courts are not only making determinations of fact and law. In determining civil liability for wrongdoing, jurists are also assessing the workings of the mind and aspects of character—sometimes individually and others organizationally—to explain, for instance, why one party deceived or disadvantaged another, or why a banker may have recklessly lent assistance to a primary wrongdoer. These mental elements—for instance, actual knowledge, wilful blindness, reckless disregard, and awareness of risk of fraud, among others—are well-established in legal theory and practice.

In brief, the law has traditionally understood criminal liability to require the concurrence of both a proscribed act (the actus reus) and a guilty mind (mens rea). Holding a financial institution to account in civil damages for harm done to the victims of fraud facilitated by an institution can also require an examination into a banker’s mind-state or their level of lawlessness of risk to loss to victims if, on their watch, a bank facilitates misconduct. Establishment of a mental element—a state of mind, knowledge, awareness, recklessness, disregard, intent—has therefore long been deemed necessary to justify culpability in both criminal cases and intentional civil torts. Despite the rise of offences imposing strict liability or reversing the burden of proof, the law continues to presume that culpability requires a mental element unless a statute provides otherwise.

Yet courts face persistent challenges in uniformly defining their meanings, interpreting applicable standards, and determining which elements must meet these standards. Even where courts agree in principle on the paramount importance of establishing civil liability for what is an intentional tort for facilitating fraud based on knowledge of financial wrongdoing, approaches to and understandings of concepts of the mind can be confused, vague, or inconsistent across frontiers. Moreover, we see in some cases, an attempt by the Court to conflate the mind state elements of proof required to impose civil liability on a bank for the commission of an intentional wrong into the elements used to prove negligence – a tort that is intended to hold careless wrongdoers to account by reason of their objective acts or omissions in causing reasonably foreseeable loss regardless of their states of mind.

The 2021 judgment in McDonald v TD Bank[2] presents a vivid case study of these issues. The tort of negligence is said to be an objective ‘conduct based’ civil wrong of carelessness which leads to accountability for reasonably foreseeable loss when there is proximity between the careless and the injured party. And yet in some civil claims against banks sounded in negligence, we can see courts importing a subjective mind-state element into what is otherwise supposed to be a wrong based on conduct falling below an accepted standard of care.

In the McDonald v TD Bank negligence judgment, the trial judge in Ontario, Canada found that (a) US$4.288 billion of loss had been caused, in fact and in law, by TD Bank’s conduct, but (b) the claim failed because the claimant liquidators of Stanford International Bank (Antigua) did not prove that TD Bank knew or had reason to suspect that Robert Alan Stanford was engaged in what was then the second largest Ponzi scheme in world financial history between 1992 and 2009 – using the US dollar correspondent banking facilities of TD Bank in Toronto to receive, process and pay out approximately $10 billion of the proceeds of the fraud. This fraud visited harm on over 22,000 people in 141 countries. Between 1985 and 1990, SIB was based in Montserrat and went by the name Guardian International Bank Limited. In 1990, Stanford moved the bank to Antigua and, in 1994, changed the name to Stanford International Bank Ltd. 

As a matter of law, the decision in McDonald has important implications for the banking industry in Canada. Claimants in like cases bear a dual burden. They will need to clearly establish that the bank’s duty of care sounded in negligence extended to the present matter, and they will also need to demonstrate that the bank’s conduct reached the high threshold set for breach of duty.

But in addition, the outcome in McDonald v TD represents a case study in divergences between several important legal principles – principally, standards for the imposition of a duty of care, reasonable expectable decision-making (captured in the concept of the man on the Clapham omnibus), recklessness, negligence and wilful blindness – coupled with the influence of judicial interpretations of those principles solely from a legal perspective and, on the other hand, the psychological underpinnings of those principles.

While McDonald is governed by Ontario law, the trial judge’s reasoning that banks do not prima facie owe a duty of care to customers unless the bank can be shown to have had actual or constructive knowledge of an underlying fraud - appears generally consistent with the Quincecare duty in English jurisprudence (which obligates a bank to refuse a payment instruction if it has reasonable grounds to believe the instruction is fraudulent, particularly when given by an agent of the customer, and is an application of the general duty of care and skill). However, a bank and its customer are in a relationship of sufficient proximity to expect that the bank will take care against visiting foreseeable loss to its customer by its own neglect. Negligence is a conduct-based tort. Equally, a banker should not be permitted to act with careless indifference to the harm the bank may do to victims of fraud facilitated by the bank. Negligence is not supposed to be conflated with an intentional tort. That is what happened, however, in McDonald.

The trial judge’s reasoning in McDonald is a textbook example of the age-old yet ongoing challenge for jurists to ascertain individual actors’ and institutional leaders’ knowing dishonesty, wilful evasion, and reckless disregard as empirically validated, psychologically sound principles in tension with but not contradictory to settled law.

Our conjoined legal and psychological analyses underscore that Courts need to improve their approach to determining the mind states of bankers, as individuals functioning within a financial institution and who may potentially be held accountable for participating in or enabling harm, as well as the organization itself for having facilitated financial misconduct.

In our view, these and other such issues lay beyond legal reasoning and asset recovery techniques. We argue that harmonizing settled jurisprudence with more sophisticated psychiatric and psychological understandings of mental states—theories of the mind in the law—will translate into beneficial real-world implications in court and for victims.

Just as criminal courts have relied upon the testimony of forensic psychiatrists and other experts when considering the defence of insanity since at least 1843 (in R v McNaughton 10 Cl & Fin 200; 8 ER 718 (HL)), it ought not be controversial that civil courts could improve the precision of their conclusions about the state of a party’s knowledge (or mind state) by relying on opinion testimony from experts in the psychodynamics of fraud and the influence of leadership decision-making and organizational culture on mitigating or facilitating institutional complicity in misconduct. Just the same, implementing even such a sensible and relatively straightforward recommendation faces obstacles.

While expert testimony continues to inform English criminal courts’ decisions on questions of diminished responsibility, fitness to plead, and whether a defendant has a treatable psychiatric illness, many judges remain sceptical of considering expert opinion on mind states in organisational governance, compliance, and employee decision-making and their direct and indirect influence on institutional participation in economic crime and in cases where victims of fraud seek to hold a bank to account for damages sounded in the unintentional tort of negligence.

One threshold challenge is convincing courts to accept what might be deemed “imperfect” evidence—the practical difficulty of proving something that cannot be independently observed—to understand the state of mind of individuals, and to reassure triers of fact and law that to do so is not arbitrary or unreliable.

Jurists are right to be concerned about ensuring the efficacy and rigor with which evidence is entered. However, any number of flawed and fossilized misconceptions relating to human psychology and mind-states have over centuries been deeply and seamlessly incorporated into law[3].

While in the law, psychology as a discipline more often sits in the background than is a matter of direct intellectual engagement, jurisprudence is in its essence a constellation of principles foundationally rooted in and structured to regulate human behaviour. The mind is central to the law.

This is not an abstraction at a remove from the real world. When we talk about wrongdoing, dishonesty, negligence, recklessness, and the like, we are referring to people injuring other people to such a degree of involvement that they need to make good a loss. These are not just abstract concepts. They draw a line in defining actionable conduct and a right to a remedy. Understanding why, their motivation, intent or knowledge of wrongfulness are all relevant when assigning blame to facilitators of fraud.

Accordingly, it is our view that the complexity of contemporary cross-border fraud and asset recovery cases warrant a thoughtful review and potential updating of how courts accept and rely on expert testimony that can rigorously and reliably deepen and amplify understanding of the role leaders, employees, and cultures of financial institutions play in causing or enabling victims’ injuries.

Judicial decision-making, while idealistically conceived as purely objective and grounded in legislative deference, is often shaped by a jurist’s blind-spots, capacities and limitations to self-regulate their personal psychology, emotional needs, and moral – or moralistically rationalized – impulses. Indeed, equally significant to matters involving the level of precision (or imprecision) of descriptions and understandings of mental states, is also the effect of how judges interpret (and misinterpret) their meaning. Justice Oliver Wendell Holmes famously made the point that the law is only that which a judge will sustain in his opinion.

Evidence of these blind spots, caused by jurists’ own psychologies, can be observed in criminal cases where juries are not allowed access to the opinion of experts, unless they are incapable of deciding on an issue: the issue is never the ultimate issue in the case. The result is the implementation of tests such as “the man on the Clapham omnibus” the “wild beast” test, the “policeman at the elbow” test, and the “irresistible impulse” test, among others.

All were attempts to provide jurists and juries with a more precise definition of mental states or conditions suggested to be causal to criminal acts. While grounded in criminal law, these efforts reflect a broader legal ambition: to identify when internal psychological conditions meaningfully affect culpability. This ambition persists in modern civil jurisprudence, particularly where courts must assess whether a defendant’s conduct meets mental thresholds such as actual knowledge, recklessness or willful blindness.

When substituted for detailed expert testimony, these and other such reasonable person or reasonably prudent and diligence person assessments can often lead to reductive conclusions, especially in cases involving complex psychological elements such as the level of a banker’s awareness of the risk of a Ponzi scheme operating through a bank customer’s account.

This is of particular importance in instances of fraud and other economic wrongdoing involving banks and financial institutions, where facts and evidence may demonstrate unquestioning compliance with unethical institutional practices and cultural norms which, claims of justifiable ignorance notwithstanding, unequivocally facilitate policies and practices which derogate or ignore duties of care and exploit legal and regulatory loopholes.

The challenges are particularly acute in civil litigation against banks and other financial institutions for facilitating financial misconduct, where institutional structure and diffusion of responsibility often obscure whether key actors had the requisite knowledge or intent required to make a bank liable to pay damages to a victim of fraud. Or to hold responsible, and certainly not passively reward, not just the dutiful lieutenants but the architects and leaders directing policies and practices which derogate or ignore duties of care and exploit legal and regulatory loopholes with impunity. And to create and uphold laws that balance society’s calls for security, trust and deterrence, with accountability and, where financial harms have been inflicted, the imposition of meaningful penalties and economically appropriate repatriation of victims’ losses. In cases involving fraud or other forms of economic misconduct, the law must parse whether individual facilitators knowingly enabled wrongdoing, turned a blind eye or merely followed institutional routines without awareness of the harm being facilitated.

McDonald exemplifies situations where the law, or a jurist’s interpretation of the law, fails to hold wrongdoers accountable (which is often tantamount to permitting wrongdoing) as a result of jurisprudential misunderstandings (or wilful dismissal) of mental states deemed pivotal to a determination or ruling.

Through inadvertent oversight or strategic exploitation of judicial, regulatory, and procedural ambiguities by bad actors and their consiglieri, both banks and courts alike can effectively abet and enable insulation from accountability for dishonest or knowing assistance, negligence, or operationally permissible but ethically reprehensible facilitation of harm to accountholders or third parties who have been defrauded or swindled.

The implications of this are that, regrettably, the law and jurists are not always or necessarily an ally in the pursuit of justice for fraud victims. Similarly, asset recovery professionals’ over-reliance on legal knowledge and judicial mechanisms can likewise be a hindrance, not a boon.

Our intent, to be clear, is not to argue that psychologically inaccurate interpretations of or misunderstandings regarding proof of actual knowledge of a fraud and affiliated mental states ought to constrain, undermine, or neuter laws codified over centuries essential for determinations of civil liability for knowingly or negligently facilitating a fraud.

To the contrary, our view is that understanding the history of the mind in the law and acknowledging the implications in courts today represents a vital step toward redressing inequities of power and advantage and, ultimately, to helping victims of fraud recover against institutional enablers when the law permits it.

We say that courts need to be made aware of the assistance which can be provided to them in their task of reaching correct decisions regarding the mind state of a banker who stands accused of knowingly or recklessly facilitating a fraud.

In tackling complex matters such as this, we consider it of paramount importance to leverage the unparalleled potency of multidisciplinary collaboration. Joining forces of different relevant professional disciplines is a force-multiplier that can exponentially amplify capability and effectiveness in complex cases, enabling more institutional wrongdoers to be brought to book and more victims to enjoy justice.

[1] For brevity’s sake, this short blog post only briefly presents two cases. In our original full-length essay, we include extensive analyses of judgments in six cases from three jurisdictions—the United States, Canada, and England and Wales.

[2] Full disclosure, Martin Kenney, acted as co-general counsel for the joint liquidators of SIB (Antigua estate) and acted as instructing counsel in the McDonald v TD Bank claim.

[3] We commend interested readers to access our full-length essay in the JIBLR for a more thorough examination of this history.

ADDITIONAL NOTES

This post is adapted from the authors’ long-form essay of the same title published in the Journal of International Banking Law & Regulation 40(9):317-336 Aug 2025 [available at: https://iccfraudnet.org/ponzi-banking-the-law-and-psychology-of-banks-that-service-financial-misconduct/]. The article was inspired by a workshop styled David & Goliath Unbound: A new paradigm for holding banks accountable to victims for enabling fraud, held at the 41st Annual Cambridge International Symposium on Economic Crime, Jesus College Cambridge, 1-8 September 2024. That ICC FraudNet-sponsored workshop was presented by the co-authors together with Michele Caratsch, Baldi & Caratsch (Zurich); Matthew Bradley KC, 4 New Square Chambers (London); and Paul Austin, LLM, Highgate (London).

Martin Kenney BA, LLB, LLM. Managing Partner of MKS Law (BVI). Founding member of ICC FraudNet. Admitted to practice as a solicitor advocate in England and Wales, the BVI, and St Vincent & the Grenadines, and a barrister and solicitor of British Columbia (non-practicing) and a New York legal consultant.

Alexander Stein, PhD. Founder and Managing Principal of Dolus Advisors (New York). Licensed clinical psychoanalyst and an expert in the psychodynamics of fraud, leadership decision-making, ethical governance, and the complex psycho-social dynamics that shape culture and risk in organisations.

Mr Kenney and Dr Stein have collaborated for many years, delivering numerous conference presentations and co-authoring around a dozen articles, while also bringing their respective professional skillsets to bear in interdisciplinary partnership to address challenging asset recovery matters.