Summary
A recent case has established that banks will not be liable to
customers for delays in processing transactions while waiting for
clearance under UK anti-money laundering legislation. While the
bank's terms and conditions did not expressly permit such
delays, the court implied such a term into the contract between the
bank and its customer. This meant that the bank was not liable
for losses resulting from its refusal to process payments
while awaiting official consent.
Case facts
The claimants in the case, Mr & Mrs Shah, deposited
US$28,000,000 with HSBC Private Bank (UK) Limited (the
Bank). The Bank delayed in making several
transfers requested by Mr Shah using the deposited funds. The Bank
refused to explain the reason for the delay in making the payments,
stating only that it was due to the bank complying with its
statutory obligations.
The reason for the delay was that the Bank was suspicious that
the deposit represented criminal property under the
Proceeds of Crime Act 2002 (the Act) and had
reported those suspicions in a suspicious activity report
(SAR) to the UK's Serious Organised Crime
Agency (SOCA). The Act prohibits banks from
dealing with funds that they suspect to be criminal property unless
they have disclosed that suspicion to SOCA and the relevant
investigating agency has either consented to the transaction
proceeding or failed to respond in the manner specified in the
Act. In this case consent to each of the requested transfers
was given.
The Bank's terms and conditions did not allow it to delay
payments in order to comply with the requirements of the Act. The
Bank accepted that, unless such a term was implied, failure to
comply with the payment instructions would be a breach of
contract.
The Act also prohibits an institution that has made an SAR from
disclosing any information to a customer that might prejudice
an official investigation. This is why the Bank only
stated that it was complying with its statutory obligations when Mr
Shah asked for an explanation for the delay.
Mr Shah was a resident of Zimbabwe, where he held substantial
investments. One of the proposed recipients of a delayed payment
complained to Zimbabwe's central bank that he had not
been paid. The complaint suggested that the
non-payment was a result of Mr Shah being investigated for
money laundering in the UK. The central bank began making enquiries
based on the money laundering allegation and subsequently seized Mr
Shah's investments, converted Zimbabwean government securities
that Mr Shah held into lower-yielding securities and terminated
a loan agreement between Mr Shah and the central bank. The
claimants argued that the Bank was liable for losses caused by
the central bank's actions.
The court's decision
The court found that there was an implied term in the contract
between the Bank and the claimants allowing the bank to refuse to
process transactions while awaiting consent under the Act. The Bank
was not in breach of contract for refusing to process the payment.
The court also found that the Bank was not obliged to disclose
information about SARs to its customers, and that it was in
any event obliged to withhold the information sought by the
claimants under the provisions of the Act.
The court found that the Bank's actions were not responsible
for the claimants' losses, since the Zimbabwean
central bank's actions were motivated by matters
other than the payment delays. Even if the losses were
attributable to the Bank's actions, they were not
foreseeable. The court also found that, even if the bank had
been liable, the claimants had not done anything to mitigate their
loss even though the payment that prompted the complaint to the
central bank was small and could have been easily funded from other
sources.
Comment
Although this decision is a good one for banks, the decision may
have been more straightforward if different internal
procedures had been followed.
Rather than relying on an implied term, a bank's terms and
conditions should allow the bank to do anything necessary to comply
with its obligations under the Act. Banks should avoid any
confusion as to which standard terms and conditions apply to a
particular account, which occurred in this case but was resolved in
favour of the Bank.
In this case, the person that decided to make the SAR did not have
formal responsibility for overseeing HSBC Private Bank (UK)
Limited's compliance with the Act. He did have formal
responsibility for other entities in the HSBC group. This enabled
the claimants to challenge whether HSBC Private Bank (UK) Limited
had the suspicion of money laundering that would have required
an SAR to be made under the Act. The court found that the person in
question was the "de facto" reporting officer for HSBC
Private Bank (UK) Limited, so the claimants' argument failed.
In order to avoid disputes over the issue, banks should ensure
that the person appointed to ensure compliance with the Act is
formally appointed as the nominated reporting officer for all
relevant group companies.
The HSBC group employee responsible for making the SAR
did not maintain any formal contemporaneous record of his
decision making process. The court was satisfied with his
reliability as a witness and believed that the factors cited in
court were those that led to his suspicions regarding the deposit.
However, any scope for challenging the basis of his
suspicions would have been avoided by maintaining appropriate
contemporaneous records.
Further reading
A copy of the decision can be found here: http://www.bailii.org/ew/cases/EWHC/QB/2012/1283.html
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 22/05/2012.