There must have been close to an audible sigh of relief from banks and other financial institutions when the final decision in the landmark case Shah and another v HSBC Private Bank (UK) Ltd ("Shah") was handed down by the High Court of Justice in May 2012, not least because it ended four and a half years of litigation, six reported decisions (three from the Court of Appeal) and a good deal of uncertainty during that time.
Mr and Mrs Shah had held accounts with HSBC Private Bank (UK) Limited ("HSBC") since 2002.
The Shahs' claim was in relation to a delay in the processing of four separate payment instructions.
In fact the delay was due to HSBC suspecting money laundering on the part of Mr Shah, HSBC making a suspicious activity report to the Serious Organised Crime Agency, and then waiting for the appropriate consent to proceed with the requested transfer of funds. At the time, the reason given to Mr Shah by HSBC for failing to execute the transfers was that they were 'complying with their UK statutory obligations'.
When Mr Shah told a creditor of his (an ex-employee of Mr Shah's in Zimbabwe) that the reason he was unable to make a payment due to him was due to HSBC complying with its UK statutory obligations, rumours spread in Harare that Mr Shah was suspected on money laundering in the UK. The Zimbabwean authorities themselves then became suspicious and firstly froze and then seized the Mr Shah's investments causing losses estimated to be over US$300,000,000. The Shahs' brought a claim against HSBC for breach of contract as HSBC has failed to promptly carry out the payment instruction and failed to explain the reason for not doing so. The consequences being that the Shahs' suffering substantial losses in Zimbabwe.
The judgment confirmed that a bank has the right to delay execution of a customer's payment instructions and refuse to provide information in circumstances where the bank has a suspicion of money laundering and discloses its suspicion to the relevant authorities.
The Court dismissed in its entirety a US$300,000,000 claim brought by Mr and Mrs Shah against their bank HSBC.
Key Points from Shah
While not critical, the appointment of a nominated officer should be properly documented.
The central issue in this case was whether HSBC suspected money laundering. The existing test for suspicion remains good law:
"the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease could not suffice. But the statute does not require the suspicion to be 'clear' or 'firmly grounded'."
Best practice is for the nominated officer/ MLRO of a financial services business to document all steps taken on deciding to make a suspicious activity report. If the nominated officer/MLRO is not the person compiling the Suspicious Activity Report, then at the very least the nominated officer/MLRO should record why he has decided to report a matter to the relevant authority.
Where a bank delays carrying out payment instructions because its nominated officer/ MLRO has a genuine and honest suspicion of money laundering, a customer should not have a claim for any losses this may cause.
A bank's terms and conditions should be drafted to expressly exclude liability where (i) a customer suffers loss as a result of a delay in the execution of its payment instruction; and (ii) the bank refuses to provide information as to why it refused to execute the transaction.
However, clauses exempting liability for damages caused by complying with legal requirements may be scrutinised on grounds of 'reasonableness'. Financial services businesses should be mindful that if such clauses are not brought to the attention of the customer (in the case of Shah, because of an existing hold-mail arrangement) such terms may be deemed to be unenforceable.
Does Shah provide certainty for banks in Guernsey?
The two big questions for Guernsey banks (and other local financial institutions) is: does the decision in Shah give MLROs and Nominated Officers an adequate defence in a money laundering case of similar facts? Also, can a bank delay execution of a customer's instructions once disclosure to the FIS has been made without fearing a claim being brought against it for breach of contract? The case that casts a shadow of doubt over Shah in terms of Guernsey banks placing full reliance on it is The Chief Officer, Customs and Excise, Immigration and Nationality Service v Garnet Investments Limited ("Garnet").
Without going into great detail of the facts and finding of this case (for detailed commentary on Garnet please see David O'Hanlon's article here), the point of importance is that Garnet had argued that refusal by the FIS to consent to a transaction allowed the FIS to effect an informal freeze over the funds, as no bank would transfer funds without FIS consent as it would otherwise be guilty of a criminal offence.
While the main interest in Garnet was the judicial review point, in the course of determining that issue the Court made some key findings that seem to increase the obligations on FSBs.
Namely, the Court of Appeal in Guernsey held that Garnet had not been put in a position of having no means whatsoever of dealing with its property as it had the right to demand payment under the banking contract, that contractual right being a matter of civil law. Only where the bank could establish a relevant defence as to why it refused to transfer funds by (perhaps) proving the necessary elements to establish the proceeds of crime offence., and the lack of FIS consent would not be relevant as a defence, would Garnet fail to obtain repayment of its funds.
This finding is a small part of a much larger judgment, although if followed could obviously significantly increase the risks to FSBs where they have proceeds of crime suspicions about a client. It may also, to a degree, undermine the clarity given by Shah in this respect. Regardless, it is apparent that it is of greatest importance that Guernsey FSBs ensure that their client terms and conditions are sufficiently robust to manage, to the greatest extent possible, the risks posed by customer actions where proceeds of crime issues arise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.