We first reported on Shah v HSBC Private Bank (UK) Ltd in February 2010 in our alert on reporting under the Proceeds of Crime Act (POCA) (the Act). It sets out the facts of the case in some detail, but in a nutshell, HSBC had delayed fulfilling several payment instructions (totalling some US$28 million) given by the claimants over several months as it suspected the funds were criminal property. HSBC made authorised disclosures by way of suspicious activity reports to the Serious Organised Crime Agency (SOCA) and, once SOCA gave its consent to proceed, processed the payments.

HSBC told the claimants that the delays were the result of it complying with its statutory obligations. It refused to give any other explanation to the claimants for the delays, in case this could be seen as 'tipping off' under the Act. In the meantime, the Zimbabwean authorities had been alerted to the fact there may be a money laundering issue and had frozen and then seized the claimants' assets in that jurisdiction. The claimants alleged a US$330 million loss and sought this from HSBC on the basis that the bank was in breach of contract for failing to process their instructions promptly or explain the delays.

HSBC had initially sought to strike out the claim against it on the basis that an implied term in the bank-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 if doing so might constitute tipping off.

The Court of Appeal reversed the finding at first instance, as outlined in our earlier alert. It held that HSBC had to prove that it held the relevant suspicion of money laundering and that, arguably, the bank had a duty to provide information to the claimants once tipping off was no longer an issue.

This latest judgment, dismissing the claimants' claim, deals with those two issues.

Relevant 'suspicion' of money laundering

HSBC had a nominated money laundering officer (MLO) for the purposes of the Act, who had delegated the role of receiving internal reports and of reporting to SOCA to another employee. It was that individual who decided, autonomously and independently, whether to submit suspicious activity reports and he was found by the court to be the effective nominated MLO. The fact that the MLO was appointed by the parent company of HSBC was irrelevant.

The authorities provide that 'suspicion' means the MLO must think there is a possibility, which is more than fanciful, that the relevant facts exist. While a vague feeling of unease is not enough on its own, the suspicion does not need to be clear or firmly grounded.

It will be a question of fact in each case as to what the suspicion was based upon. However, in this instance the court found there was no doubt the MLO had honestly and genuinely suspected that the funds in the claimant's account were criminal property. The evidence showed the MLO considered the information sent to him, investigated it, reflected upon it and then made his decision to make a disclosure to SOCA.

The court held that there was no obligation to undertake extensive investigations for the suspicion to be formed or tested. Added to this, the suspicion does not have to be of a settled nature.

The Act also struck a precise and workable balance between the conflicting interests of a bank and its customer. This required the implication of a term into the contract between the bank and its customer, permitting the bank to refuse to execute payment instructions in the absence of 'appropriate consent' under s335 POCA where it suspects a transaction constitutes money laundering. The nominated MLO constituted the bank for the purposes of the bank having that relevant suspicion.

As the MLO here had the relevant suspicion, HSBC had acted correctly in refusing to execute the payment instruction.

Provision of information about the delay

The claimants alleged that their contract with HSBC placed HSBC (as agent for its customer) under an implied duty to provide them with the information relating to its communications with SOCA. They also argued that HSBC should have sought permission from SOCA to provide that information to its customers. Specifically, they sought access to what disclosures had been made to SOCA and what the evidence was that created a suspicion.

The court rejected this argument on the basis that HSBC would not know whether its disclosure to SOCA might have, or indeed had, triggered an investigation. Similarly, it would be unclear whether the provision of the kind of information sought might constitute a tipping off. Such an implied term would undermine the integrity of the reporting regime and would operate as a disincentive to report suspicious activity.

The court found that there was, however, an implied term that permitted HSBC to refuse to provide information where by doing so it, or its servants or agents, might contravene the tipping off provisions under POCA.

Accordingly, there was therefore no duty to provide the information sought.

The court held that any disclosure by HSBC to the claimants would most likely have prejudiced the investigation being conducted. The likelihood of prejudice to an investigation has to be judged by reference to the facts available at the time of the request for information. Banks will not know whether a notification has led to an investigation, or, if they are aware of one being carried out, be familiar with the scope and reach of the investigation.

Banks will also 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 the request must be refused to avoid potential criminal liability.

Remoteness of damage

A final question for the court to answer in this case was whether the damages claimed by the claimants could be recovered from HSBC, or whether they were too remote. The claimants alleged that it was obvious the value of their assets abroad could be substantially affected if the bank account in the UK was frozen due to suspicion of money laundering. The court disagreed.

It was not foreseeable that the claimants' assets abroad would be seized. The losses that flowed from that seizing were not in the contemplation of the parties as likely to be incurred when HSBC refused to comply with the payment instructions. There had been no assumption of responsibility by HSBC for the losses that occurred and HSBC's delays in complying with the payment instruction did not cause any loss to the claimants.

Conclusion

It is acknowledged that the requirements under POCA do interfere in the contractual relationship between the customer and the bank and that this can prejudice customers. However, Parliament has recognised this as a price worth paying in the fight against money laundering.

This judgment clarifies that banks are at risk of criminal prosecution if they entertain suspicions but do not report them. The same risk applies if they report them, and then nevertheless carry out the customer's instructions without authorisation. So long as the bank's suspicions of money laundering are genuine and honest, it will avoid liability for delays caused in carrying out the customer's instructions. However, where the suspicion is based on bad faith, or there has been a mistake as to identity, this will not be the case.

This judgment will provide comfort to MLOs, whether bank-based or based in other organisations where delays in complying with client's instructions, due to suspicions of money laundering, may result in financial loss to the client.