The decision of the Court of Appeal in Shah & another v HSBC Private Bank (UK) Ltd (HSBC) will give lenders some cause for concern. The court has held that a customer whose instructions were not initially complied with due to money laundering concerns, is not bound to fail in a subsequent claim against the lender for losses suffered as an alleged result of the subsequent delay in carrying out those instructions.
The facts of the case
The claimants held accounts with HSBC and instructed it to transfer several large sums of money from various accounts held with it and to make some payments out. Suspecting that the funds were criminal property, HSBC disclosed its suspicions in relation to a number of transactions to the appropriate authorities, as it was required to do, so as to avoid criminal liability under the Proceeds of Crime Act 2002 (POCA). It then had to await the appropriate consents under POCA before being able to fulfill the claimants' instructions in the usual way.
Consents were subsequently given and the transfers were made. The claimants sought reasons why their instructions had not been complied with. HSBC's response was that it was complying with its UK statutory obligations, but gave no further information once the transactions had been completed.
The claimants contended that HSBC's failure to carry out their instructions or to properly explain the reasons for not doing so had caused their affairs elsewhere to be scrutinised, as a result of which they had suffered substantial loss. They brought a claim for breach of duty against HSBC for failing to take reasonable care in maintaining the account and for failing to provide information about the disclosures made to the authorities. They further alleged that HSBC had failed to take reasonable care by not making those disclosures as soon as reasonably practicable. They also argued that there were no rational grounds to suspect the claimants of money laundering and if its "suspicion" was induced by irrationality, negligent self-induced suspicion, mistake or automatically by, for instance, a mechanical error, then it would not be a relevant suspicion.
HSBC applied to strike out the claim.
First instance decision
The judge dismissed the claims based on irrationality, negligent self-induced suspicion and mistake on the basis that the relevant suspicion need not be based on reasonable grounds. The suspicion need only be based on a possibility which was more than fanciful that the relevant facts existed. HSBC's evidence showed that employees had been involved in the decision making process so the "suspicion" had not been mechanically generated either. The judge held that for a customer to impugn the decision to make an authorised disclosure, it had to challenge the good faith of the lender's suspicions. The claimants had not challenged HSBC's or its employees' good faith and the claim for breach of duty therefore had to be struck out.
The decision on appeal
The Court of Appeal agreed with the judge's findings on the issues of irrationality, negligent self-induced suspicion, mistake and mechanically generated suspicion.
However, most importantly, it held that there was no reason why the claimants could not require HSBC to prove its case that it had the relevant suspicion. The claimants' claim was not fanciful; HSBC was not bound to win. Any claim by a customer that their bank had not executed their instructions is, on the face of it a strong case, if indeed the instructions have not been complied with. It is only when the bank says it suspects money-laundering that a defence begins to emerge. There was no reason why HSBC should not be required to prove the important fact of suspicion in the ordinary way at trial, by first giving relevant disclosure and then by way of witness evidence. There was a danger of injustice without this.
The court appreciated that tipping-off under s333 POCA was highly relevant and could determine what evidence was admissible and who could give it. However, by the time this action came to trial it would be unlikely that there would be any issue regarding tipping-off as any investigation would likely be over by then and if it wasn't, the court could be informed of that in an admissible manner. To find otherwise would, in effect, be giving carte blanche to banks to decline to execute their customer's instructions without any court investigation.
The court did not accept either that disclosure of relevant documents, including those reporting a bank's suspicions to the relevant authority, would not or should not be ordered by a court as that would lead to the dispute being completely unjusticiable with the bank inevitably winning. There might be good argument for concealing part of a document or (more doubtfully) declining to disclose all of the documents but a judge in chambers could make that decision.
The court accepted that banks have been placed in an unenviable position by POCA. They are at risk of criminal prosecution if they don't report their suspicions, or report them but carry out their customer's instructions without authorisation. If they act as instructed by the authorities, their customers may become incensed and commence proceedings. However, that does not mean that litigation should be dismissed without any appropriate inquiry of any kind. The court's procedures should not be sidestepped unless there is an express statutory provision to that effect.
The order striking out the claim would be set aside.
The court also went on to confirm that a bank's duty of care is not completely excluded by POCA and, in principle, delay in making a relevant disclosure under POCA might be a breach of duty. There was no delay here though and so no breach. Additionally, there was no requirement for a bank to seek advanced consent under POCA in respect of future payments as the claimants argued. The authorities would be unlikely to give consent in the abstract before any payment instruction was given. Neither should disclosure have been made when the money was first paid into the claimants' account as no question of seeking authority to execute a payment instruction can arise until a payment instruction is made.
The court further held that there was an arguable breach of agency duty. An agent (the bank) is (arguably) obliged to keep his principal (the customer) informed as to the state of his principal's affairs, especially when the principal requests information. The tipping-off provisions are highly relevant here but there must come a time when, after tipping-off is no longer relevant, a principal is entitled to have more information about his affairs than the claimants had yet been given here. When that would be would be a matter of evidence.
Although the claimants get to fight on, on both the "suspicion" and provision of information points, it does not mean that they are bound to win. It is not a high threshold that HSBC has to meet – the suspicion has to be just a possibility, which is more than fanciful, that the relevant facts existed. The statute does not require the suspicion to be 'clear' or 'firmly grounded and targeted on specific facts' or based on 'reasonable grounds', although a vague feeling of unease would not suffice.
Lenders should go through a human process of looking at the facts, establishing a possibility that is more that a vague feeling of unease and having the decision checked by someone else. The more people involved in the decision making process as to whether there is enough evidence to raise a suspicion, the more likely it is that the basis of that suspicion will be justified. A clear audit trail of such steps should be maintained in case the decision is ever challenged.