In Jayesh Shah and another v HSBC Private Bank (UK) Ltd (2012) the High Court rejected the claim of Jayesh Shah and his wife Ms Shaleetha Mahabeer ("Shah") that the defendant, HSBC Private Bank (UK) Ltd (the "Bank"), had acted improperly by refusing to follow payment instructions whilst awaiting consent from the Serious Organised Crime Agency ("SOCA") in respect of a Suspicious Activity Report ("SAR") and also found that the Bank had no obligation to provide information to its customers concerning its refusal to act on instructions.
This concludes a protracted case lasting four and a half years and involving six reported decisions (including three by the Court of Appeal) and 27 days of trial (see our March 2009, March 2010 and November 2011 issues). The landmark decision provides (i) comfort; (ii) a word of warning; and (iii) direction to firms:
- comfort may be drawn from the Court's confirmation that a firm has the right to delay execution of a customer's payment instructions and to refuse to provide information if the firm has a suspicion of money laundering that has been notified to SOCA;
- a word of warning, insofar as the decision highlights the importance of having clear Anti Money Laundering procedures in place to help withstand challenges from customers (in addition to ensuring compliance with regulatory obligations); and
- direction in that money laundering reporting obligations should be clearly provided for in express terms and conditions of business, to help minimise the risk of similarly protracted legal proceedings.
The previous decisions
In light of the Bank's evidence of suspicion and the absence of any allegation of bad faith by the Shahs, the Bank initially succeeded with an application for summary judgment (for commentary on the High Court decision, see our March 2009 issue). Shah appealed, successfully: the Court of Appeal disregarded the need to show bad faith and held that the primary fact in issue was whether the Bank had a suspicion of money laundering. Longmore LJ held that a bank seeking to rely on an authorised disclosure under the Proceeds of Crime Act 2002 ("POCA") ought to be put to proof, at trial, of its suspicion that the sums involved were criminal property. Suspicion is more than a "vague feeling of unease", but less than a belief based on reasonable grounds and involves thinking that there is a "possibility, which is more than fanciful, that the relevant facts exist". Since the Bank was, on the face of it, in breach of contract, it was for the Bank to prove that it held the suspicion that it alleged (for commentary on this initial Court of Appeal decision, see our March 2010 issue).
The focus then shifted to the issue of standard disclosure and whether the Bank's obligation to give standard disclosure required it to reveal the names of employees who reported suspicions of money laundering to the nominated officer within the Bank; and if so, whether the Bank was prima facie entitled to maintain the anonymity of the individual employees involved in the supply of that information on the ground of public interest immunity. The High Court (Coulson J) answered both of these questions in the affirmative although held that the employees concerned should be identified by function, not by name (as this would preserve their anonymity, although by the time this issue came before the Court of Appeal it was common ground that this would not preserve their anonymity). Shah appealed against the Judge's refusal to require the Bank to reveal the names of the employees in question and the Bank cross-appealed against the Judge's decision that its obligation to make standard disclosure required the names to be revealed in the first place.
The Court of Appeal confirmed that CPR 31.6 was the proper test for deciding whether the employees' names should be disclosed and held that Shah's request was nothing more than a "fishing expedition". In particular, there was nothing to suggest that the identification of the individual employees of the Bank would adversely affect the Bank's case and Lewison LJ went on to state that, on the facts, the identification of the employees "is at best something that might lead to a train of inquiry that might adversely affect the Bank's case", but that this did not meet the stringent requirements of CPR 31.6.
The recent decision
Following the summary judgment decisions and skirmishes over disclosure, Supperstone J heard Shah's substantive claim against the Bank. That claim arose from the Bank's delay in executing four payment instructions (including one for approximately US$28 million) in late 2006 and early 2007, and its failure to explain the reasons for the delay, as a result of which Shah claimed to have lost over US$300,000,000.
Regarding the right to refuse to execute payment instructions, Supperstone J held 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, he found that there was an implied term in the contract that permitted the Bank to refuse to execute payment instructions in the absence of "appropriate consent" under POCA, where the Bank suspected a transaction constituted money laundering.
Supperstone J held that the Bank's nominated money laundering reporting officer ("MLRO") was the Bank's nominated officer within the meaning of POCA (albeit there was no document that established a formal appointment). Accordingly, the MLRO submitted or caused to be submitted each of the relevant authorised disclosures seeking consent from SOCA and was the correct person to give evidence regarding the Bank's suspicion of money laundering. In relation to suspicion, Supperstone J followed previous case law (R v de Silva  1 WLR 303) in establishing that the requisite level of suspicion (that the funds in Shah's account constituted or represented a person's benefit from criminal conduct) was 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'". Supperstone J also emphasised that, following K Limited (K Limited v National Westminster Bank plc  1 WLR 311), the "existence of suspicion is a subjective fact….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."
Regarding the refusal to inform Shah of its communications with SOCA and the reason for the delay, Supperstone J held that there was an implied term which permitted the Bank to refuse to provide information which, if provided, might contravene its obligations under POCA. Supperstone J stated that, "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."
A firm may be put to proof that it had the requisite suspicion of money laundering. The legal test for suspicion remains as established in previous case law and represents a relatively low threshold. Nevertheless, firms will find it easier to respond to claims like this if their internal documentation is sufficiently comprehensive and detailed to enable their suspicion to be evidenced after the event and, in particular, to show that the nominated officer at the firm was in fact suspicious. Furthermore, it is clear that as much of the relevant supporting information as possible should be included in the SAR.
Firms should formally record the appointment of their nominated officer(s) and check that it is the nominated officer who, in practice, is responsible for authorising SARs to be made. This is particularly advisable where (as in the Bank's case) the nominated officer is not employed by the same group entity as the entity with the customer relationship.
Firms can and should continue to refuse to provide any information to customers that might amount to tipping off under POCA.
When ensuring that money laundering obligations are addressed in standard terms and conditions, firms should expressly exclude liability where a customer suffers loss as a result of both a delay in the execution of its payment instruction and the firm's refusal to provide information regarding that delay. However, these clauses should be drafted carefully to minimise the risk of a challenge on grounds of reasonableness.