http://www.bailii.org/ew/cases/EWCA/Civ/2010/31.html
Financial crime: Shah v HSBC- implications for banks
In recent years a number of High Court decisions have helped clarify the relationship between a banker’s contractual obligations to its customer and its obligations under the Proceeds of Crime Act 2002 (POCA). But a recent Court of Appeal ruling may have put banks on a tightrope between criminal sanction for failing to disclose suspicious transactions and civil litigation from disgruntled customers.
POCA places banks in an invidious position because, on the one hand, banks have a contractual obligation to their customer but, on the other hand, have a legal obligation to report suspicions of money laundering to the Serious Organised Crime Agency (SOCA) before undertaking an act which might constitute money laundering. The Court of Appeal’s decision in Jayesh Shah and Another v HSBC Private Bank (UK) Limited [2010] EWCA Civ 31 now places banks in the firing line, may very well undermine the purpose of the POCA regime and is likely to encourage expensive and vexatious claims.
The claim was brought by Mr and Mrs Shah, 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 transfer funds out of the account. In the usual way, HSBC delayed making the payments pending consent from SOCA.
HSBC explained the delay to Mr Shah by saying 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's case is that the Zimbabwean authorities therefore became suspicious and froze, then seized, his investments, allegedly causing losses of over US$300million. The reason for the bank's suspicion is unknown and, for the purposes of the case, it was assumed that the funds were not, in fact, the proceeds of crime.
HSBC initially obtained summary judgment against Mr Shah, but the Court of Appeal overturned the ruling, holding that Mr Shah had the right to require the bank to prove it suspected Mr Shah of money laundering when it filed the Suspicious Activity Report (SAR).
The practical effect of the Court of Appeal ruling is to require a bank or any other reporter defending a claim for breach of contract from a customer arising out of disclosures made under POCA to prove the fact of its suspicion at trial.
This means:
a reporter may be required to disclose confidential internal notes and reports, setting out why it suspected a customer was involved in criminal activity;
reporters may be required to disclose confidential policies and procedures which are designed to combat money laundering; and
employees (including, but not limited to, the Money Laundering Reporting Officer) could be cross examined at trial.
“This court ruling has exposed flaws in the UK arrangements……it is essential our regime is now changed – and we are lobbying the Home Office accordingly''
This strikes at the very foundation of the regime and exposes firms, and those reporting suspicions, to the risk that they will be targeted by criminals.
The BBA believes the Court of Appeal ruling could place the United Kingdom regime in breach of its international obligations, namely the FATF Special Recommendation 14, and is seeking the FATF confirmation on this point.
It appears there is little or no means for banks to dismiss claims which have no real prospect of success or which are frivolous or vexatious or embarked upon as a way to obtain disclosure of the bank’s suspicion. Aggrieved, vindictive or even criminal customers might attempt to explore the basis on which the bank suspects money launderers or reports suspicions.
The final outcome of the Shah case is that it may discourage bank employees from making SARs. This could result in bank staff being criminally liable under POCA for a failure to disclose, while SOCA could find itself deprived of valuable information. Surely that is not the public policy outcome any of us, in Government, law enforcement and the private sector, would wish to see.
The BBA is pressing the Home Office and SOCA to review urgently guidance on the confidentiality and sensitivity of SARs and the protection of the identities of those who make them, as a prelude to more fundamental changes that are required to the POCA regime.
Article from the BBA
Financial crime: Shah v HSBC- implications for banks
In recent years a number of High Court decisions have helped clarify the relationship between a banker’s contractual obligations to its customer and its obligations under the Proceeds of Crime Act 2002 (POCA). But a recent Court of Appeal ruling may have put banks on a tightrope between criminal sanction for failing to disclose suspicious transactions and civil litigation from disgruntled customers.
POCA places banks in an invidious position because, on the one hand, banks have a contractual obligation to their customer but, on the other hand, have a legal obligation to report suspicions of money laundering to the Serious Organised Crime Agency (SOCA) before undertaking an act which might constitute money laundering. The Court of Appeal’s decision in Jayesh Shah and Another v HSBC Private Bank (UK) Limited [2010] EWCA Civ 31 now places banks in the firing line, may very well undermine the purpose of the POCA regime and is likely to encourage expensive and vexatious claims.
The claim was brought by Mr and Mrs Shah, 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 transfer funds out of the account. In the usual way, HSBC delayed making the payments pending consent from SOCA.
HSBC explained the delay to Mr Shah by saying 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's case is that the Zimbabwean authorities therefore became suspicious and froze, then seized, his investments, allegedly causing losses of over US$300million. The reason for the bank's suspicion is unknown and, for the purposes of the case, it was assumed that the funds were not, in fact, the proceeds of crime.
HSBC initially obtained summary judgment against Mr Shah, but the Court of Appeal overturned the ruling, holding that Mr Shah had the right to require the bank to prove it suspected Mr Shah of money laundering when it filed the Suspicious Activity Report (SAR).
The practical effect of the Court of Appeal ruling is to require a bank or any other reporter defending a claim for breach of contract from a customer arising out of disclosures made under POCA to prove the fact of its suspicion at trial.
This means:
a reporter may be required to disclose confidential internal notes and reports, setting out why it suspected a customer was involved in criminal activity;
reporters may be required to disclose confidential policies and procedures which are designed to combat money laundering; and
employees (including, but not limited to, the Money Laundering Reporting Officer) could be cross examined at trial.
“This court ruling has exposed flaws in the UK arrangements……it is essential our regime is now changed – and we are lobbying the Home Office accordingly''
This strikes at the very foundation of the regime and exposes firms, and those reporting suspicions, to the risk that they will be targeted by criminals.
The BBA believes the Court of Appeal ruling could place the United Kingdom regime in breach of its international obligations, namely the FATF Special Recommendation 14, and is seeking the FATF confirmation on this point.
It appears there is little or no means for banks to dismiss claims which have no real prospect of success or which are frivolous or vexatious or embarked upon as a way to obtain disclosure of the bank’s suspicion. Aggrieved, vindictive or even criminal customers might attempt to explore the basis on which the bank suspects money launderers or reports suspicions.
The final outcome of the Shah case is that it may discourage bank employees from making SARs. This could result in bank staff being criminally liable under POCA for a failure to disclose, while SOCA could find itself deprived of valuable information. Surely that is not the public policy outcome any of us, in Government, law enforcement and the private sector, would wish to see.
The BBA is pressing the Home Office and SOCA to review urgently guidance on the confidentiality and sensitivity of SARs and the protection of the identities of those who make them, as a prelude to more fundamental changes that are required to the POCA regime.
Article from the BBA