Post by Howell Tattersall on Mar 29, 2010 10:43:33 GMT 4
United Kingdom: An Unenviable Position: Shah v HSBC Private Bank
26 February 2010
Article by Andrew Howell and Vanessa Tattersall
Can a bank, in complying with its money-laundering obligations, open itself up to civil claims by disgruntled clients for failing to comply with instructions? The answer, it seems from the Court of Appeal's judgment in Shah v HSBC Private Bank, is potentially yes. As Longmore LJ said, this can all put banks in "an unenviable position".
Mr and Mrs Shah, two Zimbabwean-based HSBC account holders, brought a claim to recover losses of over $300 million arising out of HSBC's failure to comply with their payment instructions and to provide them with information as to why it had not honoured its mandate. HSBC's delays were a result of its disclosures to the Serious Organised Crime Agency ("SOCA") that it suspected Mr Shah of money-laundering.
Mr Shah transferred a large sum of money to an account with HSBC, and instructed HSBC to make four payments out of the account. HSBC suspected that the money was criminal property and notified SOCA, seeking permission to make the transfers requested, pursuant to sections 327 to 329 and 338 of the Proceeds of Crime Act 2002 ("POCA"). Although SOCA eventually granted permission, each payment was subject to a number of days' delay as a result of HSBC's disclosures. The shortest period between the date of the payment instruction and the payment being made was five days, and the longest was 13 days. HSBC explained the delays to Mr Shah by saying that it was complying with its UK statutory obligations. Mr Shah relayed this explanation to one of the intended payees, which led to rumours spreading in Zimbabwe that the Shahs were suspected of money laundering. The Zimbabwean authorities froze and seized many of their investments as a result, causing the huge loss.
Mr Shah asked HSBC to explain its investigations once permission to effect each of the transfers requested had been obtained from SOCA. HSBC refused, relying on the offence of tipping off in sections 333A-E POCA.
At first instance, the Shahs' claim was struck out as having no prospect of success. The Court of Appeal agreed with Hamblen J and also rejected the Shahs' arguments that:
* HSBC had failed to carry out their instructions;
* HSBC had acted irrationally and harboured a negligently self-induced and mistaken suspicion that the money was criminal property; and
* any suspicion by HSBC had been computer generated and could not have been held by any human being.
So far so good for HSBC. Longmore LJ confirmed the low subjective threshold of suspicion under POCA, agreeing with the Criminal Division of the Court of Appeal's decision in R v Da Silva: "the defendant 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 [POCA] does not require the suspicion to be 'clear' or 'firmly grounded and targeted on specific facts' or based on 'reasonable grounds'."
The Court parted company with Hamblen J, however, on whether the claim should be allowed to proceed to trial. It held that arguing that HSBC had acted in bad faith was not the only way to challenge its conduct.
Longmore LJ emphasised that banks' decisions to report suspicions of moneylaundering under POCA can be tested and investigated by the court. The Court made it clear that banks may consequently be ordered to disclose confidential communications and/or documents.
Further, it was possible for banks to be liable to customers even if they had disclosed their suspicions in good faith:
* a bank's duty of care to its customer is not completely excluded by POCA and, in principle, an unreasonable delay in making a relevant disclosure to the authorities might be a breach of that duty; and
* there is arguably an implied term in banking contracts to provide information to the customer, even where a report has been made to a relevant authority under POCA. The offence of tipping-off in sections 333A-E POCA only justifies a bank's refusal to inform a customer about an investigation throughout the seven day notice period, during which the authorities can refuse permission to continue with the requested transaction, and the 31 day moratorium period, which applies where permission is refused, and during which the authorities can obtain an order freezing the account. After the expiry of those periods, the offence of tipping off does not automatically justify such refusals.
The Court agreed that a delay of two days between receiving the payment instruction and making a disclosure did not constitute negligence (although it did not provide guidance as to how many days would constitute an unreasonable delay). It considered, however, that an action for breach of agency duty was sufficiently arguable to proceed to trial as there must be a time when Shah was entitled to more information about the conduct of his affairs.
Summary judgment granted in favour of HSBC was therefore set aside, despite Longmore LJ implying that the claim is ultimately likely to fail. The Court held that summary judgment is unsuitable in a claim by a customer that his bank has not carried out his instructions, where there is evidence supporting the claim. A defence only arises in such cases where the bank states that it suspected money-laundering, and Longmore LJ noted that it would be "unusual to grant summary judgment in favour of the party who bore the burden of proving a primary fact".
Longmore LJ went on to say that granting summary judgment would "be giving carte blanche to every bank to decline to execute their customer's instructions without any court investigation".
The case emphasises that claimants attempting to challenge banks' suspicions of money-laundering will face an uphill struggle, in that it makes clear the low threshold for suspicion.
That said, the Court was equally clear that banks cannot be given carte blanche to rely on POCA disclosures as a means of avoiding any judicial scrutiny. It is possible, in limited circumstances, for banks to be liable to customers even if they disclosed their suspicions in good faith. Further, the courts can test and investigate banks' suspicions under POCA, giving rise to potentially awkward disclosure applications.
Whether the Shahs' claim will ultimately succeed, however, is a very different matter: Longmore LJ did not appear to have any great enthusiasm for the prospects of the claimants' arguments at trial.
As the Court noted, this is a tricky area. The very nature of the POCA regime is that banks do not do what customers ask. The obvious risk is that if banks act in accordance with POCA "customers are likely to become incensed and some of those so incensed may begin litigation". It is a point which we can expect to be litigated again.
26 February 2010
Article by Andrew Howell and Vanessa Tattersall
Can a bank, in complying with its money-laundering obligations, open itself up to civil claims by disgruntled clients for failing to comply with instructions? The answer, it seems from the Court of Appeal's judgment in Shah v HSBC Private Bank, is potentially yes. As Longmore LJ said, this can all put banks in "an unenviable position".
Mr and Mrs Shah, two Zimbabwean-based HSBC account holders, brought a claim to recover losses of over $300 million arising out of HSBC's failure to comply with their payment instructions and to provide them with information as to why it had not honoured its mandate. HSBC's delays were a result of its disclosures to the Serious Organised Crime Agency ("SOCA") that it suspected Mr Shah of money-laundering.
Mr Shah transferred a large sum of money to an account with HSBC, and instructed HSBC to make four payments out of the account. HSBC suspected that the money was criminal property and notified SOCA, seeking permission to make the transfers requested, pursuant to sections 327 to 329 and 338 of the Proceeds of Crime Act 2002 ("POCA"). Although SOCA eventually granted permission, each payment was subject to a number of days' delay as a result of HSBC's disclosures. The shortest period between the date of the payment instruction and the payment being made was five days, and the longest was 13 days. HSBC explained the delays to Mr Shah by saying that it was complying with its UK statutory obligations. Mr Shah relayed this explanation to one of the intended payees, which led to rumours spreading in Zimbabwe that the Shahs were suspected of money laundering. The Zimbabwean authorities froze and seized many of their investments as a result, causing the huge loss.
Mr Shah asked HSBC to explain its investigations once permission to effect each of the transfers requested had been obtained from SOCA. HSBC refused, relying on the offence of tipping off in sections 333A-E POCA.
At first instance, the Shahs' claim was struck out as having no prospect of success. The Court of Appeal agreed with Hamblen J and also rejected the Shahs' arguments that:
* HSBC had failed to carry out their instructions;
* HSBC had acted irrationally and harboured a negligently self-induced and mistaken suspicion that the money was criminal property; and
* any suspicion by HSBC had been computer generated and could not have been held by any human being.
So far so good for HSBC. Longmore LJ confirmed the low subjective threshold of suspicion under POCA, agreeing with the Criminal Division of the Court of Appeal's decision in R v Da Silva: "the defendant 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 [POCA] does not require the suspicion to be 'clear' or 'firmly grounded and targeted on specific facts' or based on 'reasonable grounds'."
The Court parted company with Hamblen J, however, on whether the claim should be allowed to proceed to trial. It held that arguing that HSBC had acted in bad faith was not the only way to challenge its conduct.
Longmore LJ emphasised that banks' decisions to report suspicions of moneylaundering under POCA can be tested and investigated by the court. The Court made it clear that banks may consequently be ordered to disclose confidential communications and/or documents.
Further, it was possible for banks to be liable to customers even if they had disclosed their suspicions in good faith:
* a bank's duty of care to its customer is not completely excluded by POCA and, in principle, an unreasonable delay in making a relevant disclosure to the authorities might be a breach of that duty; and
* there is arguably an implied term in banking contracts to provide information to the customer, even where a report has been made to a relevant authority under POCA. The offence of tipping-off in sections 333A-E POCA only justifies a bank's refusal to inform a customer about an investigation throughout the seven day notice period, during which the authorities can refuse permission to continue with the requested transaction, and the 31 day moratorium period, which applies where permission is refused, and during which the authorities can obtain an order freezing the account. After the expiry of those periods, the offence of tipping off does not automatically justify such refusals.
The Court agreed that a delay of two days between receiving the payment instruction and making a disclosure did not constitute negligence (although it did not provide guidance as to how many days would constitute an unreasonable delay). It considered, however, that an action for breach of agency duty was sufficiently arguable to proceed to trial as there must be a time when Shah was entitled to more information about the conduct of his affairs.
Summary judgment granted in favour of HSBC was therefore set aside, despite Longmore LJ implying that the claim is ultimately likely to fail. The Court held that summary judgment is unsuitable in a claim by a customer that his bank has not carried out his instructions, where there is evidence supporting the claim. A defence only arises in such cases where the bank states that it suspected money-laundering, and Longmore LJ noted that it would be "unusual to grant summary judgment in favour of the party who bore the burden of proving a primary fact".
Longmore LJ went on to say that granting summary judgment would "be giving carte blanche to every bank to decline to execute their customer's instructions without any court investigation".
The case emphasises that claimants attempting to challenge banks' suspicions of money-laundering will face an uphill struggle, in that it makes clear the low threshold for suspicion.
That said, the Court was equally clear that banks cannot be given carte blanche to rely on POCA disclosures as a means of avoiding any judicial scrutiny. It is possible, in limited circumstances, for banks to be liable to customers even if they disclosed their suspicions in good faith. Further, the courts can test and investigate banks' suspicions under POCA, giving rise to potentially awkward disclosure applications.
Whether the Shahs' claim will ultimately succeed, however, is a very different matter: Longmore LJ did not appear to have any great enthusiasm for the prospects of the claimants' arguments at trial.
As the Court noted, this is a tricky area. The very nature of the POCA regime is that banks do not do what customers ask. The obvious risk is that if banks act in accordance with POCA "customers are likely to become incensed and some of those so incensed may begin litigation". It is a point which we can expect to be litigated again.
