Banks may have to prove suspicions of money laundering 11 Feb 2010
In a judgment handed down on 4 February, the Court of Appeal held that a bank which makes an authorised disclosure under the Proceeds of Crime Act 2002 (POCA), preventing it complying with a customer’s payment instruction, may have to prove its suspicions at trial – summary disposal of the question without disclosure and evidence is not appropriate. This decision raises important issues for bank money laundering procedures.
Relevant legal provisions
Where regulated firms, including banks, suspect money laundering in connection with a transaction with which they are concerned, they can avoid liability if, before carrying out the transaction, they make an authorised disclosure to the relevant authorities (under section 338 POCA), and have obtained appropriate consent to continue. Where a bank makes an authorised disclosure in connection with a customer’s payment instruction and the authorities have either: (i) not given notice within 7 working days of their refusal to continue with the transaction; or (ii) have refused in that period but have not within the following 31 day “moratorium period” obtained an order freezing the account, the bank must then carry out the customer’s instruction.
It is a further offence under section 333 POCA, called “tipping off”, to disclose information to anyone knowing or suspecting it may prejudice an investigation that may be conducted following the authorised disclosure.
The Claimant, Mr Shah was a wealthy businessman with interests in Zimbabwe. He had held accounts with HSBC (“H Bank”) in London and Geneva for some years. In July 2006 he transferred $28m to his London account from an account with a different bank, explaining that this was to be for a short period of time; the monies would then be transferred back to the original account. In September, following Mr Shah’s instruction to pay the funds back to the original account, H Bank said it could not do so as it was “complying with its UK statutory obligations” – i.e. H Bank had reported a suspicious transaction and was awaiting clearance as required under the POCA procedure. Consent to make the transfer was obtained on 2 October 2006 and the transfer was effected the next day.
In the following months, Mr Shah requested various transfers from his H Bank accounts, some of which were made. Three instructions were delayed, again on the basis of “statutory obligations” following authorised disclosures; in each case, the payment instructions were eventually complied with after consent was received from the authorities.
In November 2006, the Reserve Bank of Zimbabwe (“RBZ”) contacted Mr Shah asking him to explain the investigations into his affairs – how they had become aware of the investigations was not certain. They later sought information as to why his accounts had been frozen. Mr Shah and his legal advisers sought further details from H Bank about their actions and communications with the authorities, but the bank refused to disclose this. Mr Shah claimed that this prevented his complying with RBZ’s requests for more information, which resulted in RBZ seizing his assets, causing losses of approximately $300m.
Mr Shah commenced proceedings against H Bank for those losses. The bank relied in its defence on its suspicions concerning Mr Shah’s transfer requests and the obligations this entailed under section 338 POCA and to avoid any disclosure to Mr Shah that could amount to “tipping off”. Mr Shah put H Bank to strict proof of the suspicions it claimed to have. He also claimed that it would be irrational for the bank to suspect him of money laundering, that any suspicion was negligently self-induced and/or mistaken and that any automated suspicion generated by a computer programme would not meet the POCA requirements. He did not, however, allege bad faith against the bank.
The bank sought and obtained summary judgment in January 2009, the lower court judge relying heavily on the Court of Appeal’s decision in K Ltd v. Nat West Bank Ltd  1 WLR 311. Having dismissed the various claims of irrationality etc, the Court found that, absent a claim of bad faith – which was not being made – there was nothing left to claim and so the claim was dismissed. Mr Shah appealed.
The Court of Appeal’s findings
The Court of Appeal upheld the lower court’s findings on irrationality, negligent or mistaken suspicion and automatic computer-generated suspicion. However, they allowed Mr Shah’s appeal that the case was not sufficiently straightforward to be dealt with summarily. Lord Justice Longmore, giving the leading judgment, said that it was for the bank to prove its case that it had the relevant suspicion and that the normal way for that to be done was via disclosure and evidence adduced at trial: “any claim by a customer that his bank has not executed his instructions is, on the face of it, a strong claim if the instructions have not, in fact, been executed… It is only when the bank says that it suspects the customer was money-laundering that any defence to the claim begins to emerge… there is… no reason why the bank should not be required to prove the important fact of suspicion in the ordinary way at trial by first making relevant disclosure and then calling either primary or secondary evidence from relevant witnesses”.
The bank argued that, in light of K Ltd v. Nat West Bank, no court would ever expect or require the bank’s employees to give evidence on the question of suspicion once it had been raised, so that there was no point in requiring a trial as it could only ever result in the bank succeeding.
The Court distinguished K Ltd v. Nat West Bank (a judgment also given by Longmore LJ). That was a case where the bank refused to carry out a payment instruction during the 31-day moratorium period under POCA when clearance for the transaction was initially refused following an authorised disclosure. The customer sought an immediate injunction requiring the bank to make the payment; this was refused because it would have effectively required the bank to break the law by breaching the moratorium. The scope for disclosure by the bank in that case was also very limited because it ran the risk of breaching the tipping-off offence. That effectively meant that only the bank’s legal adviser would be able to give evidence and any cross-examination of him would be pointless.
This case was quite different. K Ltd was not authority for the argument that where a customer brought non-summary proceedings against a bank, the bank can obtain reverse summary relief simply by authorising its solicitor to say in a witness statement that various unidentified people in the bank had a suspicion of money laundering. By the time of any trial of that claim, the tipping off offence was unlikely to remain relevant and it would be known whether any investigation was ongoing, which disclosure in the proceedings could prejudice (on the facts it appeared there was no ongoing investigation). Therefore, the bank could be required to evidence its claim that it had the relevant suspicion without breaching POCA.
The bank had argued that no court should ever order disclosure of relevant documents relating to the bank’s suspicion in this regard, especially disclosure relating to the bank’s report to SOCA. The Court of Appeal said that this amounted to saying the case is “completely unjusticiable” and that the bank must always win. That could not be right; the Court thought the question of what should be disclosed should be decided on its merits at the disclosure stage of the proceedings, not summarily at the start.
The Court also considered various other arguments raised by Mr Shah. In particular, they found on the facts that the bank had not delayed in making the authorised disclosure. However, this finding carries with it an implication that a delay by the bank could have amounted to a breach of duty to their customer. Mr Shah also alleged that the bank owed him a duty as agent to keep him informed about the state of his affairs; this duty was breached by the bank failing to respond to his requests to explain why his instructions were not honoured. The bank continued to refuse to give this information even after it clearly believed that any investigations by the authorities had been concluded, so that there could be no question of prejudicing any investigation. The Court of Appeal held that, on the facts, this claim was sufficiently arguable that it should go to trial – raising the possibility that the Court may find the bank had an implied obligation to that effect.
It is far from certain whether Mr Shah’s claims will succeed at trial and whether the bank will ultimately have to make any substantial disclosure regarding its suspicions raised with the authorities – various privilege grounds may ultimately be relied on, including public interest immunity. Nevertheless, the judgment should be carefully considered by banks in connection with their money laundering procedures.
Banks may now have to justify in court their suspicions of money laundering that result in delays to their complying with customer instructions – a potentially costly exercise, regardless of the outcome. This raises issues as to how suspicions arise and how the bank documents and deals with them internally. This could require changes to bank money laundering procedures and training of staff involved in making decisions in this area. If disclosure has to be made in a particular case, this could raise the prospect of further claims against the bank should the documents suggest the bank delayed unreasonably in acting on their suspicions, again raising the prospect of costly and time-consuming litigation.
Importantly, banks will also have to consider very carefully, and reconsider over time, whether any refusal to provide information to a customer regarding an authorised disclosure and/or delay in complying with instructions is justified by reliance on the tipping off offence. Again, this raises issues for training and bank processes.
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com.