Banks, other financial institutions, money laundering reporting officers ("MLROs"), law firms, accountancy firms, insurers, auditors and any other professional body charged with reporting obligations in relation to suspected money laundering or other organised crime will no doubt welcome the recent decision of the High Court in Shah v HSBC Private Bank (UK) Ltd.
This decision emanates from four and a half years of protracted litigation and provides clarity and certainty for professional bodies in seeking to comply with their reporting requirements under the Proceeds of Crime Act 2002 ("POCA"). In summary, the decision confirms that a bank may delay a customer's payment instructions, and refuse to provide information, in circumstances where money laundering is suspected and a report has been made to the Serious Organised Crime Agency ("SOCA").
The Claimants, Mr and Mrs Shah, were account holders with the Defendant, HSBC Private Bank (UK) Ltd ("HSBC"), since 2002. In July 2006, Mr Shah transferred approximately US$28,000,000 to HSBC from an account held with Credit Agricole Indosuez (Suisse) SA ("CAI"), due to concerns about potential fraud on his CAI account. The money was to be held by HSBC on a monthly rolling deposit and ultimately returned to the CAI account.
During the period from September 2006 to March 2007, Mr Shah instructed HSBC to make four transfers. HSBC refused to do so, informing Mr Shah that it was "complying with its UK statutory obligations". The true reason that HSBC refused to make the transfers was because it suspected that the funds were the proceeds of crime. HSBC provided a Suspicious Activity Report ("SAR") to SOCA, informing SOCA of its suspicions and requesting permission to perform the transactions. SOCA ultimately granted HSBC permission to make the transfers, however, the time it took SOCA to consider each of the proposed transactions caused a delay.
Mr Shah's second payment instruction to HSBC was for a payment of US$7,282.50 owed to Mr Kabra, an ex-employee of Mr Shah in Zimbabwe. When HSBC refused to make this transfer and Mr Shah failed to pay Mr Kabra, Mr Kabra reported Mr Shah to the Zimbabwean police and told them that Mr Shah was the suspect of money laundering. The Zimbabwean police executed a warrant and conducted a search on Mr Shah's property in Zimbabwe. The Reserve Bank of Zimbabwe ("RBZ") asked Mr Shah to explain the investigations which were being conducted in the UK. However, HSBC refused to provide any further information stating only that they were complying with their statutory obligations. Therefore, Mr Shah was not able to respond to RBZ's queries and the Zimbabwean authorities froze and seized Mr Shah's investments in that country, causing him alleged losses of US$300 million.
Accordingly, Mr and Mrs Shah claimed that HSBC had breached its contract with them, causing damages of the alleged sum, by:
1. failing to process the payments in accordance with the instructions provided; and
2. failing to provide Mr Shah with information about the investigations that had taken place.
HSBC defended each of these claims on the following basis:
- There was an implied term in the contract between the parties which entitled HSBC to refuse to process instructions, if it suspected that the particular transactions constituted money laundering, without the consent of SOCA under section 335 of POCA
- Mr and Mrs Shah were not entitled to information about HSBC's dealings with SOCA. In any event, there was an implied term in the contract between the parties which permitted HSBC to refuse to provide such information, if to do so might cause HSBC to be in breach of a legal or other duty, including sections 333 or 342 of POCA (offences against tipping off or otherwise prejudicing an investigation). (Section 333 of POCA is the section which applied at the material time although it has since been repealed and replaced by sections 333A to 333E.)
The effect of POCA on the relationship between banker and customer
Under POCA, financial institutions risk criminal prosecution if they fail to report suspicious transactions, or if they report such transactions and nevertheless carry out the subsequent transaction without the required consent. Commenting on the effect such provisions have on the contract between a bank and its customers, Supperstone J stated that "It is plain that POCA has intervened in the contractual relationship between banker and customer in a way which may cause the customer prejudice" but that this is "a price Parliament had deemed worth paying in the fight against money laundering".
Implied Term 1 - Entitlement to refuse to process a transaction
As stated above, HSBC submitted that there must be an implied term in the contract between a bank and its customers which would entitle the bank to refuse to process a customer's instructions, if it suspected that the transaction constituted money laundering, without the consent of SOCA under section 335 of POCA. Counsel for Mr and Mrs Shah submitted that such a term should not be implied because it is "ridiculously wide", a customer would not regard it as obvious, the term is not capable of clear expression and some banks do have express terms to cater for this situation. Despite these contrary arguments, given that a bank has no alternative but to report and seek appropriate consent in relation to any instructions it received that are suspicious (or risk criminal prosecution), Supperstone J held that the term contended by HSBC is to be implied by reason of the relevant statutory provisions.
Implied Term 2 - Tipping off
HSBC contended that Mr and Mrs Shah were not entitled to information sought about its dealings with SOCA and the investigations being conducted. HSBC further submitted that there must be an implied term in the contract between a bank and its customers which permitted HSBC to refuse to provide such information, if to do so might cause HSBC to be in breach of a legal or other duty, including sections 333 or 342 of POCA (offences against tipping off or otherwise prejudicing an investigation).
Counsel for Mr and Mrs Shah opposed this contention, submitting instead that there is a contractual duty implied into the contract between a bank and its customer to provide information and to keep the customer informed about why its instructions are not being complied with. It was submitted that HSBC's failure to do so in this case constituted a breach of this duty. Supperstone J disagreed, stating that an implied term such as that posited by Mr and Mrs Shah would be unworkable because in most cases a bank would not know whether its disclosure had triggered an investigation or may do so in the future. Supperstone J stated that, in his view, had HSBC provided Mr Shah with the information sought, it would have been admitting that it had submitted a SAR to SOCA and may have subsequently alerted Mr Shah, or another third party, to the possibility of an investigation, which would in all likelihood have prejudiced that investigation.
Supperstone J agreed with HSBC's submission that there is an implied term in a contract between a bank and its customer which permits the bank to refuse to provide information in circumstances where, to do so, might constitute a breach of ss333 and 342 of POCA.
As stated above, under POCA, professional institutions are required to report suspicions of money laundering. Therefore, a central issue to be determined in this case was whether HSBC's nominated officer, Mr Wigley suspected that Mr Shah was involved in money laundering and that the monies in question were the proceeds of criminal activity. Mr Wigley said that there were seven factors which gave rise to his suspicion: (1) Someone in the Relationship Team of HSBC (who had knowledge of the customer) had formed a suspicion which had been independently considered and confirmed by the Compliance Department; (2) & (3) the movement of funds from CAI to HSBC and back again, and Mr Shah's explanation for this; (4) the size of the transaction; (5) previous concerns about activity on Mr Shah's account; (6) uncertainties about the original source of the funds; and (7) Mr Shah's connections with Zimbabwe (the amount of funds were abnormally high for Zimbabwe, which is also a high risk country).
Mr Wigley was required to give evidence over a period of six days. The judgment states that he was cross examined in great detail and at some length. In relation to his evidence, Supperstone J held that he was "left in no doubt that Mr Wigley honestly and genuinely suspected that the funds were criminal property when he submitted his report to SOCA".
As a result of the Zimbabwean authorities freezing and seizing Mr Shah's investments, Mr Shah alleged that he suffered losses of US$300 million. Mr Shah said that these losses were caused by HSBC's delay in performing the various transactions in accordance with Mr Shah's instructions and for failing to provide the information sought. Supperstone J disagreed that HSBC's conduct caused Mr Shah's alleged losses, finding that the Zimbabwean authorities were investigating Mr Shah prior to September 2006, and it was their pre-existing concerns which led to the freezing and seizure of Mr Shah's assets. In addition, it was held that Mr Shah was a wealthy man and could have paid the small amount owed to Mr Kabra from other sources, thereby avoiding any delay to this particular payment.
Banks can now breathe a sigh of relief after four and a half years of uncertain litigation which could have exposed them to civil claims for simply complying with their anti-money laundering obligations. The decision is obviously a much welcomed, although perhaps somewhat unsurprising result. It is hard to see how a court could justifiably criticise a bank for simply complying with such important statutory obligations, aimed at the investigation and prevention of crime. However, this does not mean that the decision will not have an impact on the way in which banks and MLROs in particular deal with suspicious activity in future. Mr Wigley, the MLRO in this case, was subject to a gruelling six days of cross-examination during which his conduct was examined in forensic detail, a consequence which cannot be taken lightly. This will surely encourage banks and MLROs to be even more cautious when discharging their reporting obligations. The decision also provides useful guidance to other professional bodies faced with similar obligations to report incidents of suspected money laundering or other organised crime. The reporting obligations under POCA apply to the entire regulated sector, including tax advisors, insolvency practitioners, insurance intermediaries, auditors, accountants and, more generally, any business involved in financial or real estate transactions.
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.