Introduction
Judgments in conflict
Comment


Introduction

The 2012 English High Court decision in Shah v HSBC Private Bank highlights again the need for banks and trust companies to be aware of the circumstances under which they may refuse to transfer cash or assets where there is a suspicion of money laundering. While in this case the High Court implied that a term should be inserted into the bank's terms so that it could refuse to process payments under such circumstances, the Jersey court may not take a similar approach. There is also a possibility of criminal liability if any holder of client money or assets (ie, the financial institution) has no choice but to make a transfer of tainted funds.

Under the Proceeds of Crime (Jersey) Law 1999, a financial institution may be guilty of assisting another to retain the benefit of criminal conduct (ie, assistance) if it facilitates the retention of the proceeds of criminal conduct, including by transferring the proceeds out of Jersey. This charge can be waived if the transfer is made with the consent of the police. However, consent may not be forthcoming until the police have finished investigating the case, which may be some months or years later. In the meantime, the financial institution must face the dilemma of not transferring the cash or assets and thereby being in breach of contract (and possibly liable for damages), or making the transfer and being potentially criminally liable under the law. Furthermore, the financial institution may be guilty of assistance even if it makes a transfer at the order of the court, as obeying a court order to pay over funds is no defence to the charge.

Judgments in conflict

In the 2008 Jersey case of Gichuru v Walbrook, the court implied that a term be inserted into conditions which would enable a financial institution to refuse to execute a transfer instruction where it had made a suspicious activity report under the law, provided that:

  • it could prove that it had a suspicion that the money represented the proceeds of criminal conduct; and
  • the customer was unable to prove that the funds were not tainted.

In that case the court - citing Chief Officer v Minwalla (2007) - concluded that a financial institution that took all reasonable steps to defend a claim to pay over funds would not be criminally liable even without police consent.

However, the 2011 Guernsey Court of Appeal case of The Chief Officer, Customs & Excise v Garnet Investments Limited did not take this approach of implying a term. Instead, the court held that whether a financial institution could refuse to pay over funds would depend on to the express terms of the contract with the customer.(1) If this judgment were to be followed by the Jersey courts, then a financial institution that relied on terms and conditions which do not grant discretion to refuse to make transfers where there is a suspicion of money laundering would be exposed. Furthermore, Garnet offered no comfort on the possibility of avoiding criminal liability for a financial institution where it pays over funds without the permission of the relevant Guernsey authority.

Shah v HSBC may offer some solace for financial institutions without express contractual provisions enabling them to refuse to make a transfer. In this case, the English High Court implied a term into the contract between customer and banker allowing the bank to refuse to pay over funds even where it has suspicion that the funds are the proceeds of crime.

Comment

It is unclear which judgment the Jersey court would be most likely to follow. The judgments of the Court of Appeal sitting on Guernsey cases have been found to be highly persuasive and it may be that the Jersey court would follow Garnet over Gichuru or Shah.

Terms and conditions should therefore be reviewed to ensure that financial institutions may refuse to execute a payment instruction where there is a suspicion of money laundering. Other terms may also need to be considered, such as exclusion of liability to cover such events.

For further information on this topic please contact Edward Scott at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (edward.scott@ogier.com).

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

Endnotes

(1) The case was a judicial review application made by Garnet Investments Limited, a Guernsey company beneficially owned by the son of former President Suharto of Indonesia. Garnet Investments had requested BNP Paribas to transfer some of the $48 million held in Garnet Investment's account to an account outside Guernsey. BNP Paribas, wary of a charge of assistance, declined to do so.