As banks tighten their standard terms concerning due diligence on customers and their transactions, it is inevitable that disputes will arise and that some will make their way to court. This has been a trend in other jurisdictions;(1) it is now being seen in Hong Kong. One such recent case is Pa Sam Nang v HSBC Ltd,(2) which sheds light on a bank's contractual power to freeze a customer's bank account while it carries out due diligence investigations to satisfy its obligations under local and international law relating to (among other things) anti-money laundering considerations. While the judgment is only an interlocutory one (arising from the plaintiff customer's failed application for summary judgment), it helps to illustrate some issues that arise and the difficult position in which banks can find themselves as regards meeting their duties to a customer while also maintaining the confidentiality of their investigations.
In light of the increasing legal and regulatory risks regarding money laundering and financial crimes, banks' general terms and conditions commonly include provisions allowing banks to take necessary actions to discharge their compliance obligations. These actions may include blocking and preventing dealings with the accounts while the bank carries out an investigation.
These terms are usually widely drafted to afford as much power and discretion to the banks as possible. While it is trite law that it is not for the Hong Kong courts to rewrite contractual terms (between commercial parties dealing at arm's length), the courts can be asked to ensure that such contractual powers are not abused – for example, by implying a term as to the manner in which a contractual power may be exercised (in particular, that it is not exercised in bad faith).
In Pa Sam Nang v HSBC Ltd the principal plaintiff's bank account was frozen by the bank after he was apparently added to the Specially Designated Nationals List promulgated by the US government. The account of another plaintiff (believed to be the principal plaintiff's wife) was also frozen, as was the account of her parents. Subsequently, the parents' account was released and their balance remitted to them.
The plaintiff and his lawyers repeatedly asked the bank to release his account, to no avail. The plaintiff commenced a court action against the bank and, in a somewhat bold move, applied for summary judgment (ie, judgment without trial). By the time that the case came before the court, the block on the plaintiff's account had lasted for almost a year.
Essentially, the plaintiff argued that as a customer of the bank, he was entitled to his credit balance and it was for the bank to justify its actions and explain why it had blocked his account. Being an interlocutory hearing on a summary judgment application, all the bank needed to show was a credible defence – in effect, that it had an arguable defence justifying the blocking of the plaintiff's account.
In its defence, the bank relied on its contractual right to carry out "Financial Crime Risk Management Activity" (FCRMA), which included taking any action to meet (among other things) its compliance obligations relating to the detection, investigation and prevention of financial crime, as provided for in its general terms and conditions. These terms also provided that any liability arising from the exercise of such right was excluded.
The court considered the plaintiff's application for summary judgment in two stages:
- Was there sufficient basis for the bank to invoke the contractual power to carry out FCRMA in respect of the plaintiffs' account and to freeze the accounts in the meantime?
- If the answer was yes, for how long was the bank entitled to freeze the account?
On the first question, the plaintiff accepted that his being on the Specially Designated Nationals List provided a sufficient basis for the bank to invoke the contractual power to carry out FCRMA in respect of his account.
On the second question, the court considered the UK House of Lords judgment in Braganza v BP Shipping Ltd and noted that, among other things, contractual discretion can be limited by "concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality".(3)
Given that the court was dealing with a summary judgment application, it did not go into a full consideration of the nature of an implied term that may have affected the bank's exercise of a contractual right to carry out FCRMA in the present context. However, the court appeared content to have employed an 'irrationality' test, which required the consideration of both the decision-making process and its outcome, in considering whether the bank had an arguable defence.
Based on the available evidence, the court concluded that it was clearly arguable that the bank's exercise of its contractual right was rational in terms of both the decision-making process and its outcome. Therefore, the plaintiff's application failed.
The plaintiff has applied for permission to appeal the court's decision.(4)
Given the relatively low threshold in opposing a summary judgment application (a credible defence or a triable issue), the outcome in the case is as expected; any other result would have been surprising. It is difficult to see how the plaintiff's application for summary judgment could have been granted on the facts, seeing as it raised issues that would require a full trial on the merits. Indeed, it is not entirely clear why the plaintiff's application was not dismissed outright with costs against him, as opposed to the court making an order that the bank be allowed to proceed with its defence to trial.
Interestingly, nothing in the case determines how long a bank in a similar position can block an account while it carries out relevant investigations. That is a fact-specific question; but given the complexity of the case at hand, it appears that a year or more may not be unreasonable.(5)
The judgment in Pa Sam Nang v HSBC Ltd does attempt to recognise some of the practical difficulties that a bank may face in explaining its compliance obligations in order to defend its position. For example, the court considered that it might be difficult for the bank to identify precisely and accurately the compliance obligations actually engaged unless and until the FCRMA (investigation) is completed. Further, it might be inappropriate and undesirable for the bank to disclose the full reasons for its compliance concerns if to do so would involve disclosure of the results of the investigations conducted so far (or compromise any investigation).
If an appeal does proceed to the Court of Appeal, it will face significant challenges. The court at first instance has exercised a discretion whose outcome is difficult to fault and the burden on the bank to show a credible defence was met. Any appeal judgment may well result in more (not less) sympathy for banks in attempting to balance their duties to customers with their regulatory and compliance obligations.
While the outcome may so far be as expected, the case is nonetheless interesting.(6) The plaintiff appears to be a well-connected and resourceful individual who no doubt feels aggrieved by the bank's actions; as much of his complaint appears to focus on the bank's alleged lack of engagement as to the reasons for its actions. If the case does proceed to trial, it could raise some interesting issues.
For further information on this topic please contact Jonathan Cary or Tina Wong at Smyth &Co in association with RPC by telephone (+852 2216 7000) or email (email@example.com firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk
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