The recent decision in the Court of Appeal of Bank of Scotland –v- A Ltd (The Times 6 February 2001) will be pored over by banking lawyers and in-house teams with particular care. It highlights a problem which will bedevil banks for years – unless, that is, they are prepared (a) to take a view about the purpose and effect of section 93 A-D of the Criminal Justice Act 1988, and (b) to act with sense and courage.
The clear underlying message sent out by the Court of Appeal (a strong bench, led by Lord Woolf, the Lord Chief Justice) is that the authorities are acting unreasonably, and the institutions are reacting without backbone. There is a middle ground.
The best-intentioned legislation produces many undesirable and unlooked for side-effects. The anti-money laundering legislation is no exception: in the headlong rush to attempt to rid the world of major criminal activity by signing up to money laundering directives, governments and law enforcement agencies around the world have behaved like dogs with two tails. They are so pleased with the whole concept that the mere uttering of the mantra "deprive the criminal of the proceeds of his criminal activity, and you will stop him committing crime" sends them all into an ecstatic spin. In this spirit of ecstasy they have ignored some fundamental precepts which lie at the root of commercial and contractual life, including the duty of confidentiality, and the principles of open and fair justice.
Because it is axiomatic (or politically correct) that any action in the field of serious or organized crime law enforcement (a) is better than no action at all, and (b) cannot be criticized in polite company, few voices have been raised about this madness. Instead, those who have to comply with the potentially draconian rules are bullied into submission by authorities who have no idea what commerce is (and indeed believe that anyone who makes any money is likely, by definition, to be up to no good), and no desire to find out.
There have been surprisingly few decisions in the courts about the money laundering legislation. The Drug Trafficking Act 1994 and the Criminal Justice Act 1988 have not been fertile ground for appeals. This may partly be accounted for by the fact that very few cases have been brought for "money laundering" as a primary offence. Constant complaints are made that solicitors and accountants are not filing enough reports with the National Crime Squad, but until recently very few lawyers, accountants or bankers have been prosecuted for assisting their clients to launder money, and none for tipping them off about the existence of an investigation. This, one suspects, is not for lack of trying: the fingers of the authorities are itching on the trigger, and they would dearly love to bring a case against a big bank or law firm "pour encourager les autres".
This might be about to gain added impetus: strong hints have been given that the Financial Services Authority, using its powers under the Financial Services and Markets Act 2000, is keen to prosecute financial institutions for money laundering offences – although it seems likely that most cases will come under the heading of failure to have proper systems in place. The FSA, rather than simply seeking to appear macho, however, might be better employed reviewing the Bank of Scotland case, and, before it leaps into action, suggest ways in which sense can prevail for the banking community.
Meanwhile, the authorities content themselves with a form of guerilla warfare, in which the qualities of courage and openness are not part of the armory. The weapons of this war are sly insinuation, gossip and bullying. One must admit, with great reluctance, that these weapons have been surprisingly successful in the short term. The longer term effects (like Gulf War syndrome and depleted uranium) are more difficult to evaluate.
The problems faced by Bank of Scotland in its dealings with A Ltd and others provide a stark warning. The bank had opened sterling and dollar accounts for A Ltd in 1999, and shortly afterwards large sums appeared in both accounts. Compliance officers at the bank reacted to reports from their front line officers with alarm. They asked for information from their customer, but the information provided simply caused more alarm and despondency.
The bank made enquiries of the regulators and authorities, and established that A Ltd was the subject of a fraud probe by the Serious Fraud Office. This information confirmed their fears that (a) they might be prosecuted for assisting in the retention etc of the proceeds of crime; (b) if they paid out the money in the accounts they might find themselves on the wrong end of a constructive trust action; and (c) if they did not pay out the money, they could be sued by their customer. Furthermore (d) they would not be able to say anything to the customer for fear of breaching the tipping off provisions of section 93D of the 1988 Act. The words ‘rock’, hard place’ and ‘between’ no doubt featured in their discussions of the problem.
The solution they came up with was to ask the Chancery Division what they should do. Relief seemed to be at hand: the judge (the first of many in this lengthy saga), acting without any apparent encouragement from the bank, granted an injunction freezing A Ltd’s accounts, and ordered the bank not to disclose to its customer any details of the court’s order. The customer was simply informed that the bank was looking into certain transactions, and would not allow any further movement on the accounts. (The Court of Appeal later helpfully commented that the bank had been unwise not to look at the teeth of this particular gift horse, and their lordships criticized judge number one’s pre-emptive actions.)
A Ltd had quickly found out, of course, that its accounts were frozen, and, in ignorance of either the reason for the freezing or the action which the bank had initiated (but presumably with some fairly shrewd suspicions), they also went to court, seeking an order in the Commercial Court that the contents of the accounts should be paid to its solicitors. The fact that a freezing order had been granted was only made known to the court in private. The judge (number two) faced a dilemma: he did not want to effect a breach of section 94D, and yet he clearly considered that the bank’s position was untenable. He therefore ordered that unless the bank made an inter partes application to the court within 28 days, the customer’s money should be paid over to the solicitors.
The proceedings wound on through early 2000, with the bank’s concerns moving on from potential breaches of section 93D to their exposure in costs. A private hearing in the Chancery Division (judge number three) varied the first judge’s order, and stayed the Commercial Court action. Subsequently, the money was paid out, and (although no emphasis was placed on this fact, and no one seems to have acknowledged its significance) the investigation into A Ltd was closed. This was, as far as one can gather, the result of establishing that there was nothing to investigate.
A further hearing was arranged before Judge number four (at least), which effectively brought the parties back to square one, and involved a good deal of criticism of the granting of the freezing order by the first judge. It also involved an order for costs against the bank. The bank appealed, and, 16 months after the problem had first arisen, the case reached the Court of Appeal.
The meat of the Court of Appeal’s ruling concerns the power of a court to direct a constructive trustee (in this case, the bank) how to administer a trust (in this case, a bank account which might be deemed to be held in trust for a third party). The Lord Chief Justice noted that a bank does not have a fiduciary relationship with its customer: the relationship is contractual and commercial, and the attempt to insert equitable doctrines into this relationship can only result in "doing infinite mischief and paralysing the trade of the country" (to quote an 1895 case). There was a need for certainty in commercial transactions. Lord Woolf concluded, however, that there was a power to issue directions, but that the correct respondent in such an application was the SFO rather than the client or customer. The court thought that it would be possible for a bank and an authority such as the SFO to agree the terms of disclosure to the customer, and that it should seek the guidance of the court if there were doubts. The matter would then be brought to a head by the customer bringing proceedings against the bank. Some further general directions were given about how such matters should be dealt with in future, and, much to the bank’s dismay, the costs order was upheld.
The Lord Chief Justice was unhappy with both the SFO and the bank:
"The "tipping off" legislation which was the source of the problem gave extensive powers to the police. Properly used, they were beneficial. Misused they could create unintended consequences. It is of the greatest importance that use of these powers is confined to situations where it is appropriate. Institutions such as banks need to be able to ensure that they are not affected adversely unnecessarily because of the existence of the police’s powers. The ability of the courts to grant interim advisory declarations achieves this purpose. The fact that the court now has these powers must not, however, be regarded as a substitute for financial institutions taking the decisions which should be their commercial responsibility (my emphasis).
In this case, the Bank of Scotland formed its own suspicions about its customer, and then discovered that the authorities were investigating. The fact that the suspicions both of the bank and the authorities were unfounded (or, at least, sufficiently unfounded as not to be pursued) merely underlines the problems for both banks and courts: while the authorities can go about their investigations virtually without fear of repercussions, causing commercial chaos and a great deal of wastage of both time and money, the institutions are faced with what Lord Woolf referred to as "genuinely difficult situations". The response of the authorities is simply to shrug their shoulders and say that "it is your problem not ours."
This type of attitude had already been criticized by Lord Woolf in the case of C v S ( 2AER 343). In that case a court, in the course of civil proceedings between a bank and its customer, had ordered disclosure of certain material held by the bank. The bank was then warned by the National Criminal Intelligence Service that any disclosure of this material would tip off the customer that they were investigating the activities of S. When the bank sought a steer from NCIS, that shadowy organisation responded in a manner which Lord Woolf described as "neither sensible nor appropriate". It was not right for NCIS to wave section 93D in terrorem at a bank, and sit back and await developments. "It will deter financial institutions from doing their duty to make reports if their cooperation does not result in a sympathetic and helpful response." The Lord Chief Justice complained that the state, in purporting to combat serious crime, interfered with the normal rights of a litigant, in that it deprived him of justice administered in public, knowledge of the case advanced against him, and the right to reply, and information about the reasons for the courts’ decisions. This is a long list of fundamental rights and legal concepts to be overridden by one piece of legislation. When the death of customer confidentiality is added to the list, one is forced to the conclusion that the authorities had better have a good reason for using their powers which goes beyond the simple statement that they are allowed to do so.
One serious problem is the demand for secrecy, backed up by section 93D. This section was intended, one might think, to catch villains who are knowingly involved in crime and money laundering, not respectable, if careless, bankers. It might be supposed that it would be sufficient, for the law’s proper purposes, for NCIS or the SFO to ask a bank not to pass on information. The injection of section 93D into the equation is unhelpful and completely unnecessary. All the more so when, as so often happens, the "highly sensitive and secret" investigation, which might be prejudiced by exposure, eventually disappears in a puff of smoke.
Why should it matter at all that a customer knows that he is being investigated for money laundering? What is so sensitive about this type of activity that an investigation into it should be kept secret? In any event, the very act of freezing accounts, without any explanation, is going to alert any reasonably competent person to the fact that he is being investigated. After this has happened, therefore, the cat is out of the bag, and the authorities should, if they have any claim to be acting properly and lawfully, openly put their allegations to the customer.
Sadly, however, we cannot expect propriety and openness, even in the face of criticism from the Lord Chief Justice. In one very recent case, a businessman suddenly found his bank accounts frozen. On enquiry of the bank, it emerged that this had happened after discussions between the bank and the police. The police, however, denied that it was their responsibility: they had simply passed on some information to the bank, and it was up to the bank to decide what to do with it. By this means they were presumably seeking to keep out of the courts, but once again they are acting in an irresponsible and cowardly manner, getting someone else to shake a tree, and waiting to see what will fall out.
In the Bank of Scotland case, nothing fell out. One hopes that this will give encouragement to banks to act with a bit more backbone: the fact that NCIS is nosing around in the undergrowth does not mean, necessarily, that their customer is a villain. The fact that NCIS threatens the bank with section 93D does not mean that if the bank informs its client that the reason for the freezing order is that an investigation is being carried out, it will be prosecuted. In order to succeed in such an action, the Crown would have to prove that the investigation was likely to have been prejudiced by the provision of the information. This will be impossible to prove, since it will be argued that any reasonable person will, on finding that his accounts have been frozen without explanation, conclude that he is being investigated.
Banks should therefore take the following action:
- When approached by the authorities with a request that a customer’s bank accounts should be frozen, they should say that they will do so, but only on condition that they can give full explanation to the client.
- If this condition is not met, they should say that if the authorities want to freeze the accounts, they can do so, but the bank will not join in.
- If the authorities threaten to prosecute the bank under section 94A, the bank should respond by saying that the failure of the authorities to take this action presumably means that they do not have enough evidence to support the application, and therefore the suspicion of money laundering is not sufficiently strong to take action.
- If, however, the bank is satisfied that the evidence is such that it ought to act on its own account (possibly because it fears a constructive trustee action), it should do so. However, it should also inform the customer, as fully as it deems appropriate, why the action has been taken.
- The information given to the customer might include the fact that there is an investigation, if the bank considers that this information will not prejudice the police enquiry. The police should be pressed to explain why the information will cause prejudice, in circumstances where the customer will almost certainly already be aware of the enquiry.
- If the bank wants to seek directions from the court, the respondent should be the investigating authority.
By these means, they may be able to escape from the Wonderland created by over-zealous authorities intoxicated by the powers vested in them by ill-considered legislation.
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.