UK: Suspected Fraud And “Tipping-Off”: A Dilemma For Banks

Section 93D of the Act makes it an offence to disclose information to another which is likely to prejudice an investigation or proposed investigation by the police into money laundering.

In summary, the Bank (the Bank of Scotland) became suspicious of A Ltd’s accounts held at the Bank and made its own enquiries which were designed to set its mind at rest. In fact, they had the opposite effect and led the Bank to believe that it might be regarded as a constructive trustee of the funds which it held in the accounts (since it had grounds for believing that the money might have been obtained through ‘Prime Bank Instrument Fraud’ or something similar). The Bank therefore contacted the police, the International Chamber of Commerce’s Commercial Crime Bureau and the British Bankers Association. As a result, it became aware that investigations were being conducted into activities closely associated with A Ltd, and into the activities of those connected with A Ltd.

The Bank was understandably concerned that if it paid out the monies it held in the account it could be held liable to third parties as a constructive trustee. If it did not do so, then it risked an action being brought by its customer, against which the Bank believed it would not be able to defend itself since the police were likely to invoke the tipping-off provisions contained in the Act.

The Bank therefore applied, without notice and in private, to Mr Justice Lightman for directions. The Bank submitted a skeleton argument but did not present any evidence. Lightman J made an Order freezing the account of A Ltd and providing for all matters relating to the application, including the identity of the parties and the existence of the Order, to remain confidential.

On 21 December 1999, A Ltd (unaware of the earlier Order of Lightman J) made an application to the Commercial Court to have its funds released. That application was heard by Mr Justice Gray (to whom the Bank privately disclosed the existence of the earlier Order of Lightman J). Gray J made an Order that, unless an application was made by the Bank to the Court before a certain date, the Bank must pay over to A Ltd’s solicitors the sums held by it in A Ltd’s account.

The Bank then made a further application, in private, in the Chancery Division, which was heard by Mr Justice Neuberger. The Bank asked for the issues to be resolved in a single Court and for its costs to be debited to A Ltd’s account if, as the Bank was contending, the money in that account was subject to a constructive trust. The Bank then released the money which it held to the credit of A Ltd’s account, apart from a small sum which by consent was to remain frozen because the Bank wished to safeguard its ability to recover the costs which it had incurred.

A further hearing took place before Mr Justice Laddie on 17 May 2000 to deal with the issue of costs. Laddie J took ‘a strong line’. He held that what remained of Lightman J’s Order should be discharged. He also held that, although Lightman J’s Order did not contain an express cross-undertaking in damages, a cross-undertaking was always an implicit element of an interlocutory injunction. Finally, he ordered the Bank to pay the costs of all the defendants. The Bank appealed.

By the time the matter came before the Court of Appeal, the investigations which had spawned the proceedings were no longer being continued. The Court of Appeal recognised that the Bank had found itself in a ‘genuinely difficult situation’ – not least because, as the Bank’s skeleton argument for the hearing before Lightman J stated, the police did not want information resulting from the Bank’s enquiries to be revealed even to the Court, a position which the Court of Appeal said could not be justified. The Court held that the Bank’s motives were ‘not open to criticism’. Whilst noting that it was ‘hard’ on the Bank in these circumstances that it had not only to bear its own costs, but also the costs of the other parties, the Court of Appeal (in a judgment delivered by Lord Woolf CJ) nonetheless held that Laddie J was entitled to make the Orders that he did and that it was not open to it to interfere with his decision, although it did not endorse all of his reasoning.

In particular, the Court of Appeal did not endorse the guidance given by Laddie J with the intent of avoiding similar problems arising in the future. The Judge’s guidance had covered two situations: the first where the Bank wanted to make payment, the second where it did not. The Court of Appeal recognised that this was a somewhat artificial distinction, since in most cases a bank would simply want to do what is ‘right and proper’, and went on to set out its own guidance, confined to what was ‘self-evident’ from its judgment:

• No injunction should be granted in the circumstances in which it was granted in this case.

• In any dispute as to whether a payment or disclosure may be made by a bank, the Serious Fraud Office (SFO) (on behalf of the police) and the bank should try to resolve the matter. If they cannot, then an application for interim declaratory relief may be made with the SFO as respondent. In relation to this application, it is likely that the parties will each have to bear their own costs, unless it can be shown that the SFO has acted unreasonably. This avoids the need to involve the bank’s customer or anyone else to whom there may be difficulties in providing information relating to the circumstances of the application.

• If proceedings are brought by the bank’s customer, the bank will have to take a commercial view as to whether or not to defend the action. Any proceedings should be contested as openly as possible.

• Consideration should be given as to whether it is desirable for the judge who hears any proceedings against the bank to be different from the judge from whom guidance is sought. If both matters are heard by the same judge, there is a risk that the judge may be in possession of information which is not known to the other party.

In his judgment, Lord Woolf also spent some time analysing the Bank’s contention that liability might attach to it as a constructive trustee and that, as a consequence, it should be able to avail itself of the Court’s inherent and statutory jurisdiction to guide and direct trustees as to the administration of their trusts. Although the Court of Appeal inclined to the view that a bank could seek directions, no final view was necessary on the point "since with the development of the Court’s powers to grant declaratory relief in appropriate cases, it is no longer necessary for the bank to establish the status of a trustee in order to obtain relief."

The Court of Appeal recognised that, whilst an interim declaration in proceedings involving the SFO would protect a bank from criminal proceedings, it would not automatically protect a bank against an action by its customer or a third party. However, the Court expressed the view that it "seems almost inconceivable that a bank which takes the initiative in seeking the Court’s guidance should subsequently be held to have acted dishonestly so as to incur accessory liability". (This contrasts with the view of the judge in United Mizrahi Bank v. Doherty [1998] 1 WLR 435, in which the Court expressed doubt as to whether it could exempt solicitors in advance from civil liability for knowing receipt if they received funds which it was alleged were held on trust.)

It is clearly important that, in the public interest, the police (and other authorities) are supported by financial institutions in their efforts to combat money laundering. By the same token, it is unacceptable for financial institutions to find themselves in a ‘catch-22’ situation, facing the prospect of civil and criminal penalties. The Court of Appeal gives guidance on the approach to be taken but has made it clear that the Court’s powers are discretionary and are only to be used where there is a real dilemma which requires their intervention. Even in such cases, the institution is likely to have to pay its own costs. Inevitably, therefore, the tipping-off provisions will continue to present financial institutions with real practical difficulties.

The case also leaves an important lacuna. If a bank has of its own motion closed an account as a consequence of a refusal by the National Criminal Intelligence Service (NCIS) to give consent to further transactions on that account, it could be liable to its customer in damages for the losses flowing from the closure. Nothing in the decisions of the Court of Appeal or of Laddie J suggests that a bank would not be exposed to liability in these circumstances. The possible damages claim to which a bank is exposed could be significant, through no fault of its own.

In future, action will need to be taken quickly to have the dispute resolved so that the potential for the customer to suffer loss is reduced. It is also hoped that NCIS, realising the consequences of the refusal to grant consent, will only do so in the most clear and important cases.

The best way to minimise the commercial risk is to ensure that diligent ‘know-your-customer’ procedures are followed. Consideration may also need to be given to altering the bank mandate to cover the situations in which a bank might find itself. The position though is fraught with difficulty, not only because of the terms of the Unfair Contract Terms Act 1977, but also because, were such a clause clear, any express reliance placed on it by a bank might in itself amount to tipping-off.

The Proceeds of Crime Bill, laid before Parliament on 18 October 2001, threatens to complicate matters further by introducing an even more onerous reporting regime. The Bill (in its present form) extends the reporting obligation placed upon financial institutions by requiring them to report suspicions of money laundering in respect of the proceeds of any crime, ‘serious’ or otherwise. Failure to do so will result in criminal liability if it can be shown that the financial institution had reasonable grounds for knowing or suspecting that money laundering, irrespective of magnitude, was taking place. Arguably, this could spawn a practice of protective reporting potentially undermining client confidentiality; in seeking to avoid criminal penalties, banks and other financial institutions may simply be increasing the risk of exposing themselves to civil penalty.

"© Herbert Smith 2002

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