Last year, HSBC was successful in obtaining summary judgment on a claim brought by one of its customers, Mr Shah (and his wife). Mr Shah sought damages for breaches of duty and failure to follow his instructions to process transactions whilst requests for consent under the Proceeds of Crime Act 2002 (POCA) were pending with the Serious Organised Crime Agency (SOCA). On 4 February 2010 the Court of Appeal allowed in part Mr Shah's appeal against the summary judgment.
The decision in Shah and Anor v HSBC Private Bank (UK) Limited  EWCA Civ 31 means that customers can now obtain disclosure of banks' internal documents related to money laundering disclosures and put them to proof at trial of the suspicions they report to SOCA. The case also leaves open the possibility that banks may owe duties to their customers to inform them about money laundering reports which have been made about them.
The case is likely to have an impact on all who make money laundering suspicious activity reports (SARs) including banks, financial firms and others in the regulated sector, such as lawyers and accountants. Even those outside the regulated sector for the purposes of POCA will need to ensure that proper processes are in place where they make SARs.
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The claim was brought by Mr Shah and his wife, two Zimbabwean-based customers of HSBC. HSBC suspected funds in their account to be the proceeds of crime. On four occasions the bank 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 5 days, and the longest was 13 days.
HSBC explained the delays to Mr Shah at the time 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 requested details of HSBC's communications with SOCA, which were refused. Mr Shah's case was that the Zimbabwean authorities therefore became suspicious and froze, then seized, his investments, allegedly causing losses of over US$300million.
The claim was that HSBC had breached its duty by failing to act on Mr Shah's instructions. HSBC argued at that it would have committed criminal offences under POCA had it followed the instructions whilst suspecting that the transactions constituted money laundering. Mr Shah countered by alleging that the suspicion was irrational, negligently self-induced and mistaken and, having been generated by a computer, not capable of being held by a human being. He put HSBC to proof on the suspicion it asserted it had.
On HSBC's application for strike out or summary judgment, Hamblen J rejected Mr Shah's arguments, stating that in order to challenge HSBC's suspicion successfully, Mr Shah would have to assert bad faith (which he had not done). Hamblen J concluded that there was no real prospect of success on the claim and gave summary judgment in HSBC's favour.
Mr Shah sought to overturn the decision, asserting that the claim was insufficiently straightforward to be summarily dismissed. Mr Shah also alleged that HSBC had failed in its duty to make the SARs as soon as reasonably possible. HSBC resisted the appeal, arguing that to obtain summary judgment, it was sufficient for a claimant to put in evidence facts sworn by a solicitor or, alternatively, that a court would not expect a bank to produce witnesses to give evidence as to its suspicion and that, therefore, a trial on the issue would be pointless as it would only ever result in judgment for the bank.
It is important to recognise that this was a summary judgment application, and the fact that HSBC lost does not altogether mean that they will ultimately be liable to Mr Shah. Rather, the Court was assessing whether Mr Shah's case was sufficiently arguable that it should be allowed to proceed to trial, or whether it had no reasonable prospect of success.
Evidence to justify summary judgment? What is the test for suspicion?
Longmore LJ, giving the judgment of the Court of Appeal to allow Mr Shah's appeal, said that Hamblen J had been wrong to determine that the only route open to a customer such as Mr Shah was to assert bad faith. He highlighted that it is for the bank to establish the primary fact of its suspicion in order to justify not following the customer's instructions. In those circumstances , HSBC should adduce such evidence at trial by making disclosure and calling witnesses in the ordinary way.
It was recognised that banks are in an "unenviable position" as a result of POCA, facing the risk of prosecution for failure to report suspicions or proceeding without consent on one hand and being sued by customers if they fail to follow their instructions on the other. However, Longmore LJ made it clear that "the normal procedures of the court are not to be side-stepped merely because Parliament has enacted stringent measures to inhibit the notorious evil of money-laundering...".
Longmore LJ confirmed that the bank would have a good defence if it can show it actually had suspicion. He affirmed the authorities R v Da Silva1 and K Ltd v National Westminster Bank Ltd2 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'".
He concluded that Hamblen J had, therefore, been correct to say that Mr Shah's claims in respect of irrationality and negligently self-induced suspicion had no real prospect of success, as a bank's suspicion need not be based on reasonable grounds.
Longmore LJ seemed to leave open the possibility of a mistaken suspicion giving rise to a claim, but concluded that on the facts no adequate evidence of a mistake had been put forward. He also doubted whether the assertion in relation to the computer generated suspicion would ever give rise to a successful claim as he could not see how a SAR could be made without some human input (on the facts this was not an issue in any case).
Should HSBC have made a SAR sooner?
The Court accepted that there was no evidence that HSBC had delayed in making its SARs (as they were all made within two days of receiving the instructions), but confirmed that, in principle, undue delay in making a SAR could be a breach of a banker's duty of care. The Court also considered that HSBC was not obliged to seek advance consent from SOCA for future transactions. It recognised that SOCA was likely in any event to refuse such consent requests made in the abstract. Consent should still be sought by banks, therefore, to carry out the actual instructions given by the customer.
Is there a duty to provide information to the customer about SARs?
The Court held that the question of whether HSBC caused Mr Shah to suffer loss by not providing him with information about the state of the investigation into his affairs earlier should also go to trial. Longmore LJ expressed the view that he thought it doubtful on the facts whether Mr Shah was so entitled, given tipping off concerns, and doubtful that the provision of the information once the investigation was over (and the tipping off concerns no longer arose) would have avoided the losses alleged. The judgment therefore suggests that, as agent for Mr Shah, HSBC was obliged to consider its competing duties in this regard, particularly where the customer was actively requesting information. As Longmore LJ stated "there must (arguably) come a time when Mr Shah is entitled to have more information about the conduct of his affairs…."; a blanket prohibition on the provision of information about SARs is open to challenge.
'Tipping off' concerns?
The Court also dealt with other tipping off and prejudicing an investigation issues. It considered s.333 POCA which has now been repealed and replaced with s.333A (so far as the regulated sector is concerned). The remarks of Longmore LJ still have relevance, however, and he stated that in the context of non-summary proceedings, tipping off issues were unlikely to continue to be relevant by the time of trial and that it would almost certainly be known by that stage whether disclosure by evidence in those proceedings would prejudice any investigation which was in fact taking place or contemplated. In those circumstances, it was appropriate for the bank, rather than merely its solicitor, to give direct evidence of the suspicions.
The Court also gave guidance that where it might be dangerous for a witness to give evidence or where there remain good grounds for declining to reveal a document, the courts can use their case management powers to balance the interests of the parties and ensure a fair trial, These arguments, however, could not be used to determine that the bank must win the case without examining the facts.
Impacts and Conclusions
The decision highlights the need for banks and other regulated firms to balance carefully their duties to carry out their customers'/clients' instructions and to provide them with information against their duties under POCA.
Where a suspicion is genuinely held (whether on reasonable grounds or not) and is not merely 'fanciful', the prompt making of a SAR should not result in judgment against the maker for any loss thereby caused to a customer (or another party). However, this case is likely to encourage some suspects who feel aggrieved to bring claims, even where the prospects of success are remote. The makers of SARs may therefore be faced with increasing demands on their time and resources to deal with complaints and claims as well as heightened litigation and reputational risk.
Whilst the case is principally of relevance to banks and financial institutions in dealing with their customers' instructions, there is no reason why it would not apply to failures by others in the regulated sector, for example lawyers and accountants, to carry out their client's instructions.
In theory, the decision could also have application to any entity who makes a SAR, for example companies which seek consent from SOCA because they discover that they have benefited from the crime of another party. Such companies will have to consider whether they owe any contractual or common law duties to the parties they suspect of committing the predicate offence.
It is key, therefore, that MLROs and those responsible for anti-money laundering within firms and companies (both within and outside the regulated sector) ensure that their procedures 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 consider whether their standard terms adequately protect them against claims for loss occasioned by dealing appropriately with suspicions of money laundering and making SARs.