Some Messages for MLROs
The English High Court has delivered judgment in the long-running dispute between HSBC Private Bank and a former customer of HSBC, Mr. Jayesh Shah. Mr. Shah had claimed that money laundering reports filed by HSBC about some of his accounts led to damage to Mr. Shah’s business interests causing him financial loss in excess of US$300m and Mr. Shah sought to recover these monies from HSBC. The ruling raised particular issues under the English Proceeds of Crime Act, 2002 and while this legislation is not on all fours with equivalent money laundering legislation in Ireland, the Criminal Justice (Money Laundering and Terrorist Financing) Act, 2010, the judgment provides interesting reading for MLROs in Ireland, and in particular about the internal processes and practices that should support the money laundering reporting regime.
Mr. Shah and his wife brought a claim for damages of over US$300 million arising out of delays caused by the defendants (the Bank) in executing four transfers from his account during September 2006 to March 2007 and the failure of the Bank to explain the reasons for such delay. Mr. Shah was a Zimbabwe-based business man with business interests in a range of countries including Central Africa. The Bank had delayed four payment instructions given by Mr. Shah over several months as it suspected the relevant funds represented the proceeds of criminal property. The Bank had made a number of suspicious activity reports (SARs) to the Serious Organised Crime Agency (SOCA) pursuant to the Proceeds of Crime Act, 2002 (POCA). Under POCA the consent of SOCA is required to proceed with transactions which are the subject matter of an SAR. Irish money laundering legislation, namely, the Criminal Justice (Money Laundering and Terrorist Financing), Act 2010 (the 2010 Act) does not impose an equivalent statutory consent regime. Mr. Shah pressed the Bank for an explanation for the delay in following his payment instructions. The Bank refused to give reasons and confined its explanation to simply stating that it was “complying with its statutory obligations”. The Bank was concerned that to provide more information could bring it within the “tipping-off” prohibition under POCA, which is, broadly, similar to the tipping-off provisions of the 2010 Act.
Mr Shah claimed that as a result of the Bank’s delay in processing payment the Reserve Bank of Zimbabwe (RBZ) became concerned that he may have been involved in money laundering and as a result froze and then seized his assets in that jurisdiction. Mr Shah claimed that as a result of this he sustained losses in the region of US$330 million. He sought to recover these losses from the Bank on the basis that the Bank was in breach of contract for failing to process his instructions properly or to explain the delays.
Originally, the Bank had sought to strike out this claim on the basis that an implied term in the banker customer relationship permitted the Bank to refuse to carry out instructions (without permission from SOCA). This term was implied where the Bank considered money laundering to be involved and meant it was not under a duty to provide information where doing so might constitute tipping-off. However, the Court of Appeal reversed this finding. Essentially, it ruled that the Bank could be put to proof that it held the relevant suspicion of money laundering and that, it was arguable, the Bank had a duty to provide information to Mr. Shah once tipping-off was no longer an issue. The matter then went back to the High Court for trial. This latest judgment given by the High Court dismissed the claim of Mr Shah.
The English High Court approved earlier case law which had examined the meaning of “suspicion”. Such case law had established that even though suspicion requires a lesser factual basis than belief, it must have some factual foundation. While a vague feeling of unease is not enough on its own, the suspicion does not need to be clear or firmly grounded. Suspicion is a subjective process and it will be a question of fact in each case as to what the suspicion was based upon.
In this case the court was persuaded and impressed by the evidence of the Money Laundering Reporting Officer (MLRO), Mr Wigley. He was described by the Court as a “patently honest witness” and the court was in no doubt that he honestly and genuinely suspected that the funds in question were criminal property. Mr Wigley gave evidence that there was seven factors which give rise to his suspicion and led to his decision to send the SAR to SOCA. MLROs might note that Mr Wigley said that his typical practice around reporting amounted to a three stage process: he would absorb the information sent to him; he would investigate; and he would reflect and decide. The Court gave the “thumbs-up” to this approach as it demonstrated the appropriate level of judgment and independence that an MLRO should apply. It also confirmed that there was no obligation on an MLRO to conduct extensive investigations, an MLRO has a reporting obligation as opposed to an investigative one.
The Court said that the POCA struck a precise and workable balance between the conflicting interests of a bank and its customer and this balance required the implication of a term into the banker/customer contract permitting the bank to refuse to execute payment instructions in the absence of appropriate consent under POCA where it suspects a transaction constitutes money laundering. It said that the MLRO here constituted the Bank for the purpose of the Bank having the relevant suspicion. As the MLRO had the relevant suspicion, the Bank had acted correctly in refusing to execute the payment instruction.
Should the Bank Provide an Explanation for the Delay?
Mr. Shah also claimed that his contract with the Bank placed the Bank, as its agent, under an implied duty to provide him with the information relating to its communications with SOCA. It was also argued the Bank should have sought permission from SOCA to provide that information to its customers and access to what disclosures were made to SOCA and what the evidence was that created the suspicion. Mr Shah claimed that it was part and parcel of the Bank’s duty as an agent that it would keep the customer informed of the reasons why its instructions could not be complied with.
The court said that the main obstacle to the imposition of such an implied term was that it is most unlikely that banks would be in a position to know whether their disclosure has triggered an investigation, or might lead to an investigation in the future. Similarly, it would be unclear whether the provision of such information might constitute tipping-off. For this reason such a term would be unworkable. Moreover, the practical upshot of such an implied term would be to require banks regularly to reveal the factual basis of their suspicion. The Court noted that the evidence of Mr Wigley illustrated the problem which the implied term contended might produce. He had said that from the time he had made the disclosure he was of the view that an investigation might be conducted by SOCA. The whole purpose of the reporting regime is to enable enforcement agencies to investigate possible criminal activity. A bank or any other regulated entity which has made an SAR will rarely be in a position to know whether its suspicions are shared by law enforcement and/or whether any investigations might be conducted following the disclosures. In the light of this Mr Wigley said the Bank does not generally disclose such information.
The Judge said he agreed with the Bank that the likelihood is that the implied term suggested would cut across the statutory regime, operate as a disincentive to report suspicious activity and undermine the integrity of the reporting regime. Furthermore, any implied term that required banks to take steps to obtain this information from SOCA would be unreasonable in the light of the number of SARs the banking sector makes.
However, the Court found there was an implied term that permitted HSBC to refuse to provide information where by in doing so, it or its servants or agents, might contravene the tipping-off provisions under POCA. For this reason it ruled there was no duty to provide the information sought. The Court said that any disclosure by the Bank to the Claimant would most likely have prejudiced the investigation being conducted. The likelihood of prejudice has to be judged by reference to the particular facts at the time of the request for information. In general, banks will not be aware whether a notification has led to an investigation, or, if they are aware of one being carried out, be familiar with its scope and reach. Banks will almost never know whether the customer seeking the information is wholly innocent therefore, if on the facts available at the time of the request for information, there is a risk of tipping-off, then to avoid potential criminal liability it must refuse the request. The Court said it was satisfied on the facts available to the Bank at the material time that the Bank was at risk of criminal liability for tipping-off and therefore was entitled to refuse the request. The Judge also said he was satisfied that SOCA would not have given the Defendant permission to disclose the information requested by Mr Shah.
Remoteness of Damage
Finally, the Court looked at whether the failure to provide the information caused any loss or whether such losses were too remote. Essentially, Mr Shah’s case was that it was obvious that the value of his overseas assets would be affected if the bank account in the UK was frozen due to suspicions of money laundering. The Court rejected this argument. It said the losses sustained by Mr Shah through the RBZ seizing its assets were not foreseeable. It was not foreseeable that if RBZ, or any third party, was informed that the Bank had not carried out the instructions given by Mr Shah because they were complying with their UK statutory obligations, that RBZ would seize his assets in Zimbabwe and take the action that they did. The Court said that the losses that resulted from the seizure of assets were not in the contemplation of the parties as likely to be incurred when the Bank failed to execute the payment instructions.
Messages from the Case?
The judgment in this case, like all court rulings, needs to be read by reference to the particular facts and relevant legislative provisions. However, there are some practical messages for Irish regulated businesses subject to the 2010 Act and, in particular, for MLROs.
First, the ruling broadly provides reassurance that the courts will not hold a reporter liable for discharging its statutory obligations properly. Where a suspicious transaction report is made in good faith and honestly the Courts will not place an MLRO on proof to justify and explain the decision and will not second-guess the thinking behind a report. While the Irish courts have not yet considered the point, this outcome sits well with the reporting requirements in the 2010 Act and relevant regulatory guidance.
Secondly, the case shows the importance of an MLRO having robust systems and processes in place to demonstrate that decisions to report are made independently and documented appropriately. This approach should also be reflected in the drafting of the report itself. Again, this makes sense for MLROs operating under the 2010 Act. The case also confirms the importance of tight record-keeping procedures.
Thirdly, the court acknowledged that it will be virtually impossible for an MLRO to be confident that a report will or will not end up the subject of an investigation. This will also be the position in Ireland. The ruling simply confirms that to ensure distance from the zone of “tipping-off” MLROs should stay clear of any dialogue about the fact of a report having been made.