The latest High Court decision in this longrunning case should provide relief for businesses who feared that complying with their legal obligations under statutory Anti- Money Laundering (AML) regimes might render them liable for damages for any losses alleged by their customers.
The decision clarifies how duties to customers and AML obligations should interrelate. It also provides guidance on the appointment of Money Laundering Reporting Officers (MLRO), and the approach which they should take in considering whether to make an authorised disclosure to a supervisory body, such as by way of a Suspicious Activity Report (SAR) to the Serious Organised Crime Agency (SOCA) in England and Wales, or a Suspicious Transaction Report (STR) to the Financial Crime Unit (FCU) in the Isle of Man.
This is the sixth reported decision in this case which has been ongoing for four and a half years. It has seen lawyers questioning almost every aspect of how the Proceeds of Crime Act 2002 (POCA) of England and Wales should function in practice and what its application means both to financial institutions and their customers.
Mr Shah, a customer of HSBC in London, conducted a business of lending money to banks and other institutions in Zimbabwe. Between September 2006 and February 2007 HSBC delayed executing four separate payment instructions from Mr Shah because of a suspicion that the funds were the proceeds of crime. HSBC made an SAR to SOCA each time Mr Shah made a request and waited for authorisation from SOCA before processing the requested payments, as required by POCA.
When questioned about the delay HSBC told Mr Shah that it was complying with its statutory obligations but did not provide him or his solicitors with any further information. The intended recipient of one of the delayed payments informed the Zimbabwean authorities that Mr Shah's account had been frozen and subsequently the Zimbabwean authorities froze and seized Mr Shah's investments in Zimbabwe when he was unable to provide details of the UK investigations.
Mr Shah brought proceedings against HSBC claiming that they had breached their duties to him by not complying with his instructions to make payments and by failing to provide him with information about the SARs. He further alleged that HSBC acted on suspicions that were mistaken, irrational and negligent, so the reports to SOCA should never have been made. Mr Shah claimed that the Bank's alleged breach of duties had caused his assets in Zimbabwe to be frozen and resulted in losses of over US$300 million.
Findings of this judgment HSBC did not commit a breach of their duties to Mr Shah by not processing the payments. Mr Shah asserted that HSBC had a contractual obligation to act on his instruction and effect the four transactions. The judge decided that POCA acted to imply a term into the Bank's contract with Mr Shah to the effect that it could refuse to execute instructions in the absence of appropriate consent from SOCA where it suspected that a transaction constituted money laundering. This means that, whilst banks should normally act to implement the instructions of their customers, if to do so would constitute a criminal offence and a breach of AML obligations there is no such duty on the bank to process the payment. A bank's obligations under POCA override duties it would otherwise owe to its customers.
Who was the 'Nominated Officer'?
The judge considered who, in a case where the defendant corporation is part of a global group, constituted the defendant when asking the question of whether the defendant had the requisite level of suspicion to make an SAR in good faith and cause the processing of payments to be delayed until SOCA gives its consent.
In this case the MLRO who made the disclosures to SOCA, Mr Wrigley, was not employed by the subsidiary of the Bank named in the proceedings, but by its parent company. The MLRO for the whole group, including the defendant subsidiary, had delegated to Mr Wrigley the role of Nominated Officer for receiving authorised disclosures from employees relating to money laundering offences made under POCA in respect of all HSBC operations in the UK. The judge criticised the Bank for not properly documenting this appointment and delegation, but as it was understood by Mr Wrigley, the Bank and the Bank's employees that he was the Nominated Officer that was sufficient to determine who the Nominated Officer was. The judge also found that Mr Wrigley exercised management and control over decisions to make an external SAR, had autonomy in making these decisions and exercised his judgment independently. The question was therefore whether Mr Wrigley had the right level of suspicion to make a SAR and cause the payments to be delayed.
What Approach Should an MLRO Take?
The judge confirmed the subjective test for suspicion given in the case of R v. Da Silva  1 WLR 303: "the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice". He also reconfirmed the findings of K Limited v. National Westminster Bank plc  4 All ER 904 that there is no legal requirement that there should be reasonable grounds for suspicion. Therefore there could be no legal argument that a suspicion is mistaken, irrational or negligent; what is important is that it is truly held.
The judge noted how useful it would have been if Mr Wrigley had made a contemporaneous note of the reasons leading him to make the SAR, as this would have made it easier for him to prove that he acted with sufficient reasoning. The judge supported the three-stage process adopted by Mr Wrigley for deciding whether to make an SAR. Absorbing information sent to him as nominated officer, investigating the concerns escalated to him and reflecting upon the information and deciding independently whether to make an SAR.
Not providing information to Mr Shah did not breach HSBC's duties to him and was the correct approach to avoid committing a tipping-off offence. Mr Shah contended that the Bank had an implied duty to provide him with information when he asked for it and to keep him as a customer informed of the reasons why his instructions could not be complied with. Mr Shah had asked for the name of the authority to whom the disclosure was made, SOCA reference numbers, copies of consents, the primary facts which caused the disclosure to be made and documentary evidence of this.
The Bank refused to provide the requested information as they believed that to do so may constitute a criminal offence under either s.333 or s.342 of POCA. These sections create offences where a person who knows or suspects that an authorised disclosure has been made, or that an appropriate person is acting in connection with an investigation into a money laundering offence which either is or is about to be conducted, makes a disclosure likely to prejudice any investigation that is being or is likely to be conducted following that disclosure.
The judge found that banks would not be in a position to know whether disclosures they had made had, or would, trigger an investigation and therefore whether providing such information might constitute an offence under s.333 or s.342 of POCA.
Further, the judge stated that to put a duty on banks to tell customers about disclosures they make about their accounts would act as a disincentive to report suspicious activity and so undermine the integrity of the reporting regime.
Consequently no such implied term was imposed on HSBC and the bank was said to have acted correctly in not revealing information which it felt would be tantamount to a tipping-off offence. Instead the judge found that "if, on the facts available to the bank at the time of the request, there is a risk of "tipping-off", then to avoid potential criminal liability it must refuse the request".
This part of the judgment acts to create an implied term into banking contracts that permits banks (their employees and agents) to refuse to provide information where they believe that in providing that information they may contravene POCA by way of tipping-off or prejudicing investigations, and so expose them to criminal liability.
Having found that HSBC acted correctly by making the SARs, not making the payments and not providing information to Mr Shah, and having found that even if it had provided the information as requested this would not have stopped the alleged losses caused by the Zimbabwean investigation, there were no grounds on which Mr Shah could claim damages.
What this Means for Financial Institutions and Businesses
A number of lessons can be learned from the Shah case which have a much wider application to financial institutions and all businesses concerned with how to implement AML requirements. Where a bank delays carrying out payment instructions because its nominated officer has a genuine and honest suspicion of money laundering, a customer will not have a claim for losses this may cause. However this will not hold true if the suspicion is fanciful, made in bad faith or not independently formed by the nominated officer. It is best practice to document all steps taken when making decisions whether to make STR. Record the basis for the suspicion and put those influencing factors into the STR to defeat any allegations of reporting in bad faith which may later arise. Whilst the absence of formal appointment of a nominated officer does not invalidate his appointment or the work he does, it is advisable to properly document this. Do not provide any information to customers that might amount to tipping off. Requirements under POCA override any such obligation that could be said to be owed to a customer. Draft terms and conditions of customer contracts with AML obligations in mind. The judge in the Shah case noted that clauses exempting liability for damages caused by complying with legal requirements which were drafted into HSBC contracts would be unenforceable if the bank failed to show them to be reasonable and did not sufficiently bring them to the notice of the customer.
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.