UK: High Court Addresses A Bank's Obligations Towards Its Customers Following The Filing Of A Suspicious Activity Report ("SAR")

Last Updated: 19 February 2013
Article by Rachel Couter, David Calligan, Gregg Beechey and Alex Jayne

The recent case of Shah v HSBC Private Bank (UK) Ltd [2012] EWHC 1283 (QB) confirms that where a bank has made a SAR to the Serious Organised Crime Agency ("SOCA") concerning a customer suspected of money laundering, the bank is legally entitled to delay the execution of transfers on behalf of that customer until authorisation has been given, and to refuse to provide information to the customer.

Mr Shah had asked HSBC Private Bank (the "Bank") to process four transfers of funds held in his HSBC account.  The Bank made SARs in relation to each transfer because it suspected that the funds in question constituted criminal property.  The processing of the funds was delayed while the Bank awaited responses from SOCA1.  The Bank informed Mr Shah that it was unable to process the transactions because it was "complying with its statutory obligations".  The Bank did not want to provide Mr Shah with any further information in order to avoid liability for the "tipping-off" offence2, whereby a person who obtains certain information in the course of a business in the regulated sector3 can be criminally liable if he or she makes a disclosure which is likely to prejudice an investigation.  

Mr Shah argued that the Bank's failure to carry out the transfers promptly had caused him substantial losses of over US$300 million.  Mr Shah claimed that these losses had occurred because rumours that Mr Shah was involved in money laundering had caused governmental authorities in Zimbabwe to freeze and seize a number of assets that he held in Zimbabwe.

Mr Shah put forward the following arguments of particular relevance to the regulated sector:

  1. The Bank did not itself suspect that the transfers requested may constitute money laundering: the suspicion was held within another entity within the HSBC group, and even then, there was no evidence that could properly have led to that suspicion.  Therefore, Mr Shah argued, the transfers should have been made; and
  2. The Bank had a duty to provide information about the delay in processing the transfers (e.g. the fact of the SAR and the basis therefor), irrespective of the concerns about tipping-off.

Suspicion

Who needs to hold the suspicion?

One of the bases on which Mr Shah argued that nobody at the Bank held a suspicion of money laundering, was that the compliance officer who made the SARs was not employed by the Bank but by another entity within the HSBC group (HSBC Plc).  The High Court dismissed this argument, finding that an individual who exercised management and control over the decisions of the Bank as to whether or not to make a report to SOCA, even if not formally appointed in that role, and who exercised his/her judgment autonomously and independently, was capable of having relevant suspicion and making the decision to report to SOCA on behalf of the Bank.

What constitutes suspicion justifying a SAR?

The compliance officer's suspicion in this case was based on the following factors:

  • the money would only be in Mr Shah's bank account for a short period of time before being transferred back to the bank that it had come from;
  • the size of the transaction (the transfers amounted to approximately US$38 million);
  • uncertainty as to the source of the funds; and
  • the association of Mr Shah's business with Zimbabwe which was designated as a "high risk" jurisdiction by HSBC.

Mr Shah said that this was not sufficient to amount to "suspicion" for the purposes of the money laundering legislation. The Court disagreed and found that the Bank's compliance officer had honestly relied on these factors (as well as others), and that there was no need for the suspicion to be based on "reasonable grounds" or for the suspicion to be of a "settled nature" (except in limited circumstances)4.

Further, the Judge found that a term could be implied into the banking contract between Mr Shah and the Bank permitting the Bank to refuse to execute a payment instruction where it suspected that transactions may constitute money laundering but had not yet obtained authorisation from SOCA.

Is the Bank obliged to provide any information to the client?

Mr Shah alleged that the Bank:

  1. was in breach of its contract with him in failing to provide information as to its communications with SOCA; and
  2. was negligent and in breach of its banking contract with him in failing to seek permission from SOCA to provide the information sought.

The Judge was of the view that there was an implied term in the banking contract between Mr Shah and the Bank that the Bank did not have to provide any information which may contravene the "tipping-off" offence under POCA, irrespective of whether in fact it would do so.  The Judge considered that imposing a duty on banks to provide information to customers they suspect of money laundering would be unworkable because the banks would not be in a position to know whether or not the SAR had led or might lead to an investigation which might be prejudiced by the provision of such information, thereby triggering the tipping-off offence.

Mr Shah's second argument above was also rejected, as the Judge was satisfied that SOCA would not have released the information to the Bank if it had asked for this.

Conclusion and Practical points

This is welcome clarification and confirmation for banks and other financial institutions that, where there is suspicion of money laundering, the obligation to wait for SOCA consent to a transfer and not to "tip-off" the customer overrides any contractual or other obligation to the relevant customer.  The result is that banks and other financial institutions should hold firm and continue to refuse to provide information to customers that might amount to tipping off, and will not be in breach of contract if they do so.  To limit the risk of further disputes in that regard, if account terms and conditions do not already so provide, firms should consider amending the same to incorporate the implied term found in Shah as an express term, namely the express power to refuse to comply with a customer's instructions if it would breach the firm's statutory obligations, and not to give any reasons for that refusal.  It may also be helpful for firms to expressly exclude liability for any losses suffered as a result of the delay in the execution of a payment instruction.

What is also helpful clarification is that it is acceptable to provide a short holding response to the customer, where a firm is awaiting consent from SOCA.  What remains unclear is whether refusing to tell the customer anything at all, or sending the short holding response, could in particular circumstances in and of itself amount to tipping off.  It is our view (which is supported by the High Court's decision in Shah) that it should be exceptional circumstances indeed before such an approach could fairly be criticised.  But if there are significant concerns in that regard, in the light of the particular circumstances, then we would recommend taking specific advice or, at the very least, discussing the approach (or the terms of the short holding response) with SOCA.  

Finally, banks and other financial institutions should take comfort from the fact that suspicion is just that: suspicion.  It does not matter if it is wrong.  It does not even have to be based on reasonable grounds or held by someone employed by the firm making the SAR, provided it is honestly held and held by the relevant individual that is responsible for making the decision to make the report to SOCA on behalf of the firm (even if not formally appointed as such).  Nonetheless, for evidential purposes, firms should ensure that the underlying reasons for the suspicion are documented (or set out in the SAR). 

SJ Berwin LLP has substantial experience in providing solutions to money laundering issues in the regulated sector.

Footnotes

1. SOCA must respond to an authorised disclosure within 7 days (see section 335(5) of the Proceeds of Crime Act 2002 ("POCA")), failing which consent to the transaction which is the subject of the authorised disclosure is deemed to have been given.

2. See section 333A of POCA.  For persons outside the regulated sector, section 342 of POCA provides for an offence of prejudicing an investigation if that person knows or suspects that an investigation is being conducted or contemplated.

3. The types of businesses covered by the words "regulated sector" are set out at Schedule 9 of POCA.

4. The Judge referred to another case where an example had been given of a defendant who entertains a suspicion but on further thought honestly dismissed it from his or her mind as being unworthy, or as contrary to such evidence as existed, or as being outweighed by other considerations.  In such circumstances, a judge may give a direction that the suspicion must be of a "settled nature".

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.

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