The High Court has clarified the extent to which banks are required to disclose information to their customers about whom they have made money laundering disclosures or have obligations to such customers which could expose them to liability in the event that the banks' money laundering disclosures causes loss to those customers.
The facts of this case highlight the difficult practical issues which can arise when a bank reports money laundering suspicions in relation to a customer. Banks run the risk of committing money laundering offences under the Proceeds of Crime Act 2002 (POCA) unless they notify the Serious Organised Crime Agency (SOCA) of any money laundering suspicions by making a Suspicious Activity Report (SAR). Once a bank makes a SAR to SOCA concerning a customer's bank account it will not be able (without running the risk of committing money laundering offences) to undertake any transaction in respect of the funds within that account until such time as "appropriate consent" has been given.
In such circumstances, banks are placed in the unenviable position of being unable to act in accordance with their customer's instructions. Such a situation not only has the propensity to damage the relationship between bank and customer but also carries the risk that the customer might incur some loss due to the bank's inability to act on the customer's instructions. To the extent that loss does arise, who should be responsible, the bank or the customer? In addition, because of the "tipping off" provisions in POCA, banks are not able to disclose to their customer the real reason for their inability to act on instructions. To what extent are banks entitled to withhold from their customer the reasons for not acting on instructions? These matters were the subject of consideration by the High Court in this case.
The High Court (Supperstone J) firmly rejected the customers' claim that the bank had acted improperly in refusing to follow instructions whilst awaiting consent from SOCA in respect of a SAR and also found that the bank had no obligation to provide information to the customers concerning the reasons for its refusal to act on instructions. Although the judgment is not altogether surprising in arriving at such a conclusion it will be of comfort to banks. However, this case does, nevertheless, highlight the need for banks to ensure that they have in place clear procedures in order to be able to withstand challenges from their customers (in addition to ensuring compliance with their regulatory obligations in respect of money laundering procedures). The case also demonstrates that it would be prudent for banks to ensure that their money laundering reporting obligations are clearly provided for in their express terms and conditions of business to seek to avoid the position being the subject of debate in contested legal proceedings.
The High Court's judgment brings to an end this long-running litigation. We have previously reported on the Court of Appeal's decisions in interim applications in relation to an attempt by the bank to have the claim struck out (available here) and in relation to to a dispute over whether the identity of the employees of the bank who had made the internal SAR needed to be disclosed (available here).
- Where a firm relies upon having made a SAR and needing to await consent from SOCA in defence of a damages claim for breach of duty to a customer, the defendant firm can be put to proof that it had the requisite suspicion of money laundering.
- Whilst proof is only required (in the absence of bad faith being established) of the fact of suspicion, firms should ensure that their internal documentation is sufficiently comprehensive to enable this to be shown after the event and that the relevant person within the bank (its nominated officer) was him/herself suspicious.
- The legal test for suspicion remains as set out in previous well established authority (and is a low threshold).
- Where there is no express term, the courts will imply a term that permits a firm to refuse to execute payment instructions in the absence of "appropriate consent" where a SAR has been made.
- Firms are not under a duty to provide an explanation to clients. Although not specifically considered by the High Court, it would appear that firms would be permitted to tell customers by way of explanation that they are complying with their UK statutory obligations.
The claim was brought by Mr and Mrs Shah, two Zimbabwean based customers of HSBC Private Bank (UK) Limited (HSBC). HSBC suspected funds in their account to be the proceeds of crime. On four occasions HSBC sought SOCA's advance consent to requests for transfers out of the account. In the usual way, HSBC delayed making the payments pending consent from SOCA. The shortest period between the date of the transfer instruction and the payment being made was five days and the longest was 13 days. HSBC explained the delay to Mr Shah by saying that it was complying with its UK statutory obligations. Mr Shah passed this explanation on to one of the intended payees. This led to rumours spreading in Zimbabwe that Mr Shah was suspected of money laundering in the UK. Mr Shah's case was that the Zimbabwean authorities therefore became suspicious and froze, then seized, his investments, allegedly causing losses of over US $300 million.
Mr and Mrs Shah claimed that HSBC was in breach of contract in failing to process their payment instructions and in failing to provide them with detailed information and documentary evidence as to the facts that had caused HSBC to fail to effect the transactions on their account.
Was HSBC entitled not to act on Mr Shah's instructions?
HSBC contended there was an implied term of its contract with customers that it was entitled to refuse to process instructions in the absence of consent under POCA if it or its agent suspected that the transactions constituted money laundering. Supperstone J considered it was self-evident that the reporting regime under POCA made inroads into the contractual duty of banks to comply with a customer's payment instructions and that this could cause the customer prejudice. Accordingly, Supperstone J found that there was an implied term in the contract that permitted HSBC to refuse to execute payment instructions in the absence of "appropriate consent" under POCA where HSBC suspected a transaction constituted money laundering.
In order to be able to rely on the implied term enabling it to refuse to execute payment instructions, HBSC had to demonstrate that it did in fact suspect that the transaction constituted money laundering.
In order to establish whether or not HSBC had the relevant suspicions, Supperstone J had to consider which natural person or persons constituted HSBC for these purposes. HSBC submitted that its nominated money laundering officer, Mr Wigley, was the directing mind and will of HSBC for these purposes. This was the subject of some challenge by Mr and Mrs Shah as it transpired that Mr Wigley was employed by another HSBC company. Moreover, there was no document which established a formal appointment of Mr Wigley as HSBC's nominated officer for the purposes of money laundering disclosures. Supperstone J, whilst noting that he would have expected Mr Wigley's appointment as HSBC's nominated officer to have been formally documented, was nevertheless satisfied based on the evidence provided that Mr Wigley was in fact HSBC's nominated officer and he did not consider the absence of any evidence of a formal appointment was fatal.
Whilst not, ultimately, a problem for HSBC in this case, banks may wish to check that they have formally recorded the appointment of their nominated officer(s) and check that it is the nominated officer(s) who, in practice, are responsible for authorising SARs to be made, in order to avoid the sort of challenge unsuccessfully raised by Mr Shah.
Supperstone J also found that Mr Wigley had authorised the submission of the four SARs to SOCA and that in each case the submission was made after he had formed his own independent suspicion based on the factual information known to him. In determining whether or not HSBC held the requisite suspicion that the funds in Mr and Mrs Shah's account constituted or represented a person's benefit from criminal conduct, Supperstone J followed Longmore LJ's judgment in R v de Silva  1WLR which set out that suspicion means that the bank:
"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. But the statute does not require the suspicion to be 'clear' or 'firmly grounded and targeted on specific facts or based on reasonable grounds'".
Supperstone J also followed Longmore LJ's analysis in K Limited that:
"The existence of suspicion is a subjective fact. There is no legal requirement that there should be reasonable grounds for the suspicion. The relevant bank employee either suspects or he does not. If he does suspect he must (either himself or through the bank's nominated officer) inform the authorities."
Mr Wigley was the subject of extensive cross examination at the hearing concerning the basis on which he held the requisite suspicion. Mr Wigley was required to give evidence for over six days and the judgment indicated that the wording of each of the SARs sent to SOCA was closely scrutinised. The prospect of such cross-examination, notwithstanding the relatively low threshold for suspicion, underlines the importance of a proper 'audit trail' of the basis for suspicion, and will be a matter of some concern to MLROs and nominated officers.
Was HSBC required to provide an explanation to Mr and Mrs Shah?
Mr and Mrs Shah contended that HSBC was in breach of contract by refusing to provide information as to its communications with SOCA and that HSBC was negligent and in breach of contract in failing to seek permission from SOCA to provide the information sought. Mr and Mrs Shah's counsel contended that the duty to provide the information sought arose from a duty to be implied into the banking contract to provide information because HSBC acted as the customer's agent in certain circumstances and that is an implied duty of any agent.
Supperstone J considered that the principal argument against the imposition of such an implied term was the fact that it was most unlikely that banks would be in a position to know whether their disclosure had triggered an investigation or might lead to an investigation in the future and therefore whether provision of the information sought might constitute a "tipping off" offence under POCA. Moreover, the practical effect of the implied term would be to require banks regularly to reveal the factual basis of their suspicion. Supperstone J considered that such an implied term would cut across the statutory regime, operate as a disincentive to report suspicious activity and undermine the integrity of the reporting regime. Supperstone J also considered that such an implied term would be unreasonable in view of the number of SARs which the banking sector made.
Instead, Supperstone J found that there was an implied term that permitted HSBC to refuse to provide information where in providing such information it might contravene its duties under section 333 and section 342 of POCA (being the offences dealing with tipping off and prejudicing investigations). Accordingly, Supperstone J held that HSBC was not under a duty to provide the information sought. Supperstone J stated:
"The likelihood of prejudice to an investigation has to be judged by reference to the facts available to a bank at the time of the request. The banks will not necessarily know whether an SAR has led to an investigation and, even when they do, they will be unlikely to know the scope of that investigation and whether it extends to third parties (and if so, which third parties). Equally, banks will almost never know whether the customer seeking the information is wholly innocent. But 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."
Supperstone J also rejected Mr and Mrs Shah's counsel's submission that HSBC should actively have sought consent from SOCA to provide information to them; a ruling that will be welcomed by banks as the converse position could have created real practical difficulties for both banks and SOCA.
Following a detailed consideration of the facts surrounding the Zimbabwe authorities' decision to seize Mr Shah's assets, Supperstone J considered that the Zimbabwe authorities were investigating Mr Shah prior to HSBC's SAR and that it was the Zimbabwe authorities' pre-existing concerns which had led to the seizure of Mr Shah's assets. Based on the somewhat unusual facts of the case Supperstone J found that the failure to provide information did not cause Mr and Mrs Shah the losses claimed.
Having concluded that Mr and Mrs Shah failed to establish any liability on the part of HSBC, Supperstone J considered, briefly, whether HSBC would in any event have been entitled to rely on an exemption clause in its standard terms and conditions of business and whether the losses claimed were too remote.
Insofar as the exemption clause was concerned (which sought to exclude liability for loss caused by action of any government or government agency or for any direct or indirect or consequential loss), an issue arose over the extent to which the clause had been incorporated in the contract between Mr and Mrs Shah and HSBC. Mr and Mrs Shah's bank account was the subject of a retained mail mandate. It appeared that the relevant exemption clause was contained in a version of HSBC's terms and conditions that had not been seen by Mr and Mrs Shah at the time of opening their account but which was contained in amended terms and conditions which would not have been sent to Mr and Mrs Shah but would have been held by HSBC in accordance with the terms of the retained mail mandate. Mr and Mrs Shah's counsel submitted that in such circumstances it was not possible to say that the amended terms and conditions had been accepted by Mr and Mrs Shah. That submission was rejected by Supperstone J who considered that by reason of the operation of the retained mail mandate Mr and Mrs Shah were deemed to have accepted the amended terms and conditions. Supperstone J's conclusion in this regard was not the subject of any detailed reasoning.
Mr and Mrs Shah's counsel also argued that the exemption clause was unreasonable under the terms of the Unfair Contract Terms Act. Mr and Mrs Shah's counsel relied on the case of AEG (UK) v Logic Resource Limited  CLC 265 where Hophouse LJ said at 278:
"If a party wishes to rely upon clauses, which are caught by the Act and in respect of which he has to discharge a burden of proof of reasonableness, he has to make a positive case and prove whatever is necessary by way of factual background and other commercial considerations that he says suffice to establish the reasonableness of the clause."
In circumstances where HSBC had not called any evidence at trial in order to make out a positive case Supperstone J said that he was not satisfied that HSBC had established the reasonableness of the clauses on which they sought to rely. Had HSBC called any evidence the impression from the judgment is that Supperstone J would have found on the facts of the case that the exemption clause was reasonable.
Supperstone J also considered that the losses sustained by Mr and Mrs Shah through the Zimbabwe authorities seizing their assets were not foreseeable.
The outcome of this long-running litigation, on a highly unusual fact pattern, does not come as any great surprise, but some aspects of the Judge's reasoning are of interest. Overall, the judgment is helpful to the position of banks (and indeed any entity that is required to make a SAR) particularly as regards the Judge's willingness to imply a term that the bank was not required to perform the contractual mandate, and its refusal to imply a term that the bank was required to disclose details of the SAR to Mr and Mrs Shah. However, the case is a stark illustration of the practical impact of the Court of Appeal's earlier ruling that firms can be called upon to justify their decision to make a SAR, and underlines the importance of having in place procedures which are designed effectively to record the evidence of suspicion and to produce an audit trail leading to the ultimate making of a SAR, in order to seek to ensure that unmeritorious claims do not succeed.
Firms should also review whether their standard terms of business adequately protect them in the event that claims are made against them for dealing appropriately with suspicions of money laundering and making SARs.