UK: Banks and the Proceeds of Crime Act 2002 - Court of Appeal Decision

A recent case in the Court of Appeal has confirmed that there is no breach of mandate where a bank refuses to comply with a customer's instruction after making a notification to the relevant authorities in accordance with the Proceeds of Crime Act 2002 (the "Act").

In this case, the bank made a notification to HM Revenue and Customs ("Customs") after becoming suspicious of a transaction for the purchase of mobile phones where corresponding payments were received from a bank in the Dutch Antilles. Consent to act was not received from Customs within the initial 7 working day period and so the bank was unable to comply with the customer's payment instructions. The customer sought and was refused an interim injunction requiring the bank to comply with his instructions. Subsequently the bank was granted consent to follow the customer's instruction and the transaction took place. A question in this case was whether the customer could enquire as to whether the bank's suspicion (on which its notification was based) was reasonably held.

The Court held that the bank had been correct in the approach it had taken in this matter. The judge disagreed with Counsel for the customer who had argued that the bank was acting in breach of contract in refusing to honour the mandate. The Court reasoned that parliament had struck a "precise and workable balance" between the conflicting interests, which arise out of the provisions of the Act. It was recognised that the interference caused to a customer's business when the bank refuses to comply with instructions due to a suspicion of money laundering is limited in time and reasonable in order to tackle the "evil" of money laundering.

The Court in particular considered the nature of the concept of suspicion. It upheld previous guidance given in the criminal courts, which had said that a suspicion "is a possibility, which is more than fanciful". The Court in this case reasoned that the civil court and criminal court needed to take a standard approach to the definition of suspicion. The Court considered suspicion to be entirely subjective and not susceptible to challenge. If a suspicion is raised, the bank is obliged to inform the authorities and act in accordance with the procedure laid down by Parliament in order to avoid criminal liability. Importantly for banks, the Court rejected Counsel for the customer's contention that the individual bank employee should be cross-examined as to how a suspicion was raised, if a customer brought an action for breach of mandate.

This case is good news for banks who should feel confident in making notifications in circumstances where they have a relevant suspicion of money laundering and following the procedures set out in the Act.

Law: K Limited v National Westminster Bank Plc [2006] EWCA Civ 1039

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

The original publication date for this article was 25/07/2006.