UK: Disclosure Obligations Under Part 7 Of POCA

Last Updated: 14 July 2009
Article by Edward Davis and Sue Millar

In Shah & Anor v HSBC Private Bank (UK) Ltd [2009] EWHC 79 (QB), the Court considered the conflict that can arise between a bank's duty to its customer and its duty to make an authorised disclosure under Part 7 of the Proceeds of Crime Act 2002 ("POCA") when the bank suspects the customer of laundering money.

Mr and Mrs Shah (the "Claimants") held a bank account with the Defendant bank ("HSBC"). In September 2006 and February 2007 the Claimants instructed HSBC to execute four transfers on their behalf. The transfers were not completed immediately and the reason given for the delay was that HSBC was complying with its UK statutory obligations. However, the real reason for the delay was that HSBC suspected that the funds in the Claimants' account were criminal property.

Under section 340(3) of POCA, property is criminal property if it constitutes a person's benefit from criminal conduct or it represents such a benefit (in whole or in part and whether directly or indirectly) and the alleged offender knows or suspects that it constitutes or represents such a benefit. Because of its suspicions, before HSBC could proceed with each transfer, it was obliged to make an authorised disclosure under Part 7 of POCA and wait for the appropriate consent from the relevant authorities. In each case, consent was given and HSBC promptly executed the transfers.

The Claimants however sought damages arising out of HSBC's failure to carry out the transfers punctually and subsequent refusal to explain the specific reason for the delay.

The Claimants had told Mr Kabra (one of their creditors and an ex-employee) that the reason for their delay in making a payment to him was because their bank had to comply with its statutory obligations. Dissatisfied, Mr Kabra communicated this to the Zimbabwean authorities who then decided to investigate the Claimants' financial affairs, believing that the Claimants must be suspected of money laundering in the UK. The Claimants' connection to Zimbabwe is not clear from the judgment but it appears that they had a business in Zimbabwe and had employed Mr Kabra there.

Not only did Mr Kabra's communication with the Zimbabwean authorities harm the Claimants' reputation in Zimbabwe, they said, but the Zimbabwean authorities themselves became suspicious and subsequently froze and seized the Claimants' investments. The Claimants contended this caused them losses of over US$300m. The approximate total of the Claimants' claim against HSBC was US$380m.

HSBC made an application to strike out the claim and/or seek summary judgment, and the Claimants applied to amend their Particulars of Claim. In dealing with these applications, the Court's key findings, in favour of HSBC, were as follows:

  1. HSBC had a relevant suspicion and was thus obliged to disclose to the appropriate authorities. Under POCA, suspicion is a subjective matter. The Judge said "In the context of a bank, the relevant employee either suspects or he does not. If he does, he must inform the authorities". Contrary to the Claimants' argument, there is no requirement that the suspicion is rational or reasonable, provided that it is genuinely held. In order to dispute HSBC's decision to make an authorised disclosure under POCA, the Claimants would have had to challenge the good faith of HSBC's suspicion.
  2. The Court acknowledged that there is a potential conflict of interest between a bank's duty to its customers and its disclosure obligations under POCA. However, as the Court of Appeal recognised in K Ltd v National Westminster Bank plc & Ors [2006] EWCA Civ 1039, this conflict is obviously "a price that Parliament deemed worth paying in the fight against crime". The Judge posited that a breach of duty may occur when a bank delays in making a disclosure under POCA to the authorities, or fails to carry out a transfer once it has received the appropriate consent. There was no evidence of such a breach in this case. The bank's disclosures had been made within two days of the payment instructions, which was not an unreasonable delay.
  3. The Claimants had argued that HSBC had failed to comply with the Claimants' instructions to provide information as to HSBC's alleged communications with the authorities. The information requested included the name of the authority to which the Claimants had been reported, with any reference numbers and the date of the report. The Court held that if HSBC had disclosed the information sought by the Claimants, HSBC would have committed the criminal offence of 'tipping off' under POCA. Following HSBC's disclosure to the authorities, there was a clear possibility that an investigation would be conducted. HSBC would risk facing criminal liability if it revealed anything which might prejudice the investigation. For this reason, it was held that HSBC was right not to have notified the Claimants of the true reason for the delays in the transfers.

Despite finding in favour of HSBC on the above points, however, the Judge ruled that the case should proceed to trial because he did not consider that the issues relating to remoteness of damage and causation could be concluded on a summary basis.

Practical implications

The decision provides useful clarity for banks on the conflict of interest that can arise between their duty to customers and their duty to disclose under POCA. The Court has confirmed that a suspicion that funds are criminal property does not have to be reasonable – it is sufficient if there is no evidence of bad faith. The decision also sets out examples of where a breach of duty may occur in connection with a disclosure under POCA. The Court found that banks are under a duty to make a report without unreasonable delay where they have suspicions about a transaction, and to comply with instructions without unreasonable delay once consent has been obtained.

This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood (link to Stephenson Harwood website here ).

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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