PROCEEDS OF CRIME ACT 2002 Shah -v- HSBC Private Bank (UK) Ltd

PROCEEDS OF CRIME ACT 2002Shah -v- HSBC Private Bank (UK) Ltd MLRO's.com Daren Allen DLA Piper UK LLP Tuesday, 2 March 2010

POCA - The Dilemma Customer Regulated Firm SOCA Contractual Obligation X Tipping off Statutory Obligation Suspicion of Money Laundering 28583144.1

POCA AND CONSENT • C -v- S • Bank of Scotland -v- ‘A’ Limited • Squirrell -v- National Westminster Bank • K Limited -v- National Westminster Bank – Court of Appeal • UMBS • Shah -v- HSBC Private Bank (UK) Ltd 28583144.1

K Ltd - Suspicion “There is no legal requirement that there should be reasonable grounds for suspicion. 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.” Longmore LJ K Limited 28583144.1

K LtdBreach of Mandate "If the law of the land makes it a criminal offence to honour a customer's mandate in these circumstances there can, in my judgment, be no breach of contract for the Bank to refuse to honour its mandate …. If that is right, there would be no issue to be tried in any later legal proceedings“ (emphasis added) Longmore LJ K Limited 28583144.1

K Ltd - Injustice to Customer “The truth is that Parliament has struck a precise and workable balance of conflicting interests in the 2002 Act. It is, of course, true that to intervene between a banker and his customer in the performance of the contract of mandate is a serious interference with the free flow of trade. But Parliament has considered that a limited interference is to be tolerated in preference to allowing the undoubted evil of money-laundering to run rife in the commercial community. The fact that the interference lasts only for 7 working days in what we were told were the majority of cases and a further 31 days only … shows that the interference with freedom of trade is limited.” Longmore LJ K Limited 28583144.1

Shah -v- HSBC - The Facts (1) • The Claimants held an account with HSBC Private Bank. • Between 20 September 2006 and 28 February 2007, the Bank delayed execution of four separate payment instructions given by the Claimants, including an instruction to transfer approximately US$28million. • The Bank suspected that the funds in the Claimants' account were criminal property. It made an authorised disclosure seeking consent. • Once consent had been given, the Bank complied with the instructions except for one, which the Claimants cancelled. • In each case, the Bank told the Claimants that it was complying with its statutory obligations but declined to provide any further information to the Claimants or their solicitors. 28583144.1

Shah -v- HSBC - The Facts (2) • Mr Shah contends that HSBC's failure to carry out payment instructions and to explain the reasons for not doing so has caused substantial losses. • The Claimants case is that when in September 2006 Mr Shah told a creditor (an ex-employee) that HSBC's compliance with its UK statutory obligations was the reason he was unable to make a payment due to him, rumours spread in Harare that Mr Shah was suspected of money laundering in the UK. • The effect of this was, the Claimants contend, to stigmatise Mr Shah's reputation in Zimbabwe. As a result of this, the Zimbabwean authorities themselves became suspicious and firstly froze and then seized his investments (held through certain private companies) causing him losses of over US$300m. 28583144.1

Shah -v- HSBC - The Facts (3) The Claim:- • Breach of contract - arising out of the Bank's failure to comply with instructions • Breach of confidence • Breach of agency duty (failing to provide an explanation for delays) • Substantial damages 28583144.1

The Decision of Hamblen J • Evidence of suspicion: a three stage process and, in each case, at least three people (at staff, compliance and money laundering reporting office level) had held a suspicion. • The Court accepted the Bank's evidence that it held a suspicion and in each case had made an authorised disclosure seeking consent. • Duty of care to report suspicion without unreasonable delay: the Court accepted that, in general terms, a banker owes a duty of care to its customer. • A banker who unreasonably delays seeking consent once it has decided to do so, or who unreasonably delays complying with instructions once consent has been obtained, might be in breach of that duty. 28583144.1

The Decision - continued • Court found it difficult to see how consent to a transaction could be obtained until the details of the transaction in question are known. • The Bank's disclosures had all been made within two days of payment instructions, which was not an unreasonable delay. • Breach of confidence when seeking consent: Bank held a relevant suspicion and had no choice but to make an authorised disclosure. • The Court found that the making of an authorised disclosure was exempted from any breach of confidence irrespective of whether the suspected criminal property in fact turned out to be criminal property. 28583144.1

Breach of Contract - The existence of an implied term "The bank is most unlikely to be in a position to know whether or not the property is criminal property, but if it suspects that it is, then in order to avoid potential criminal liability under POCA it must make a disclosure and seek appropriate consent. Analytically this may be legally permissible as the result of an obvious and/or necessarily implied restriction on or qualification of the bank's duties rather than on grounds of illegality, but the result is the same." (Hamblen J. para 39) 28583144.1

Court of Appeal - The Issues • What is the test for suspicion? • How does a bank prove suspicion? • Did the bank delay in making disclosures? • Was the bank under a duty to provide an explanation for its refusal to execute payment instructions? 28583144.1

Court of Appeal - Suspicion (1) CLAIMANTS' ARGUMENTS: • Suspicion must be rational • Suspicion must not be self-induced by negligence • Suspicion must not be mistaken • Suspicion must not be generated mechanically 28583144.1

Court of Appeal - Suspicion (2) The Court of Appeal held : • "To allow a claim based on irrationality or negligently self-induced suspicion would be to subvert [the decisions in Da Silva and K Ltd]" • "No evidence has been put forward to advance an assertion of mistake" • "the position in the case of a mechanically generated suspicion may be less clear in theory but it is almost impossible to suppose that a report could be made to SOCA …. which had no human input" 28583144.1

Court of Appeal - How does a bank prove suspicion? "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 …. 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 the relevant disclosure and then calling either primary or secondary evidence from relevant witnesses …. There is a danger in injustice in deciding cases without appropriate disclosure and cross-examination" (emphasis added) 28583144.1

Court of Appeal Danger to witnesses • "If the bank …. genuinely takes the view that it will be dangerous for a witness to give evidence …. the court can be so informed and take steps to protect the witness or otherwise ensure the gist of his evidence is available" 28583144.1

Court of Appeal Disclosure of SARs • "If the bank has good grounds for concealing parts of any relevant document …. these grounds can be laid before the judge in chambers and he can make a decision on appropriate evidence" 28583144.1

Breach of Duty of Care - Delay in making disclosures • "The bank's duty to comply with POCA may restrict or qualify those duties but I accept that it is well arguable that such duties are not completely excluded by POCA. So, for example, if a bank sought appropriate consent to make a bank transfer under POCA and, having obtained such consent, unreasonably delayed in carrying out that transfer, it may well act in breach of duty. Similarly, if, having decided to make an authorised disclosure under POCA in relation to a requested transfer, the bank unreasonably delayed in making that disclosure to the authorities then again a breach of duty may be involved" (Hamblen J. para 58) • Court of Appeal agreed 28583144.1

Breach of Duty of Care • Scope of duty of care: • Does not give rise to a duty to form suspicion on reasonable or rational grounds. • A duty might exist on banks to make authorised disclosures without unreasonable delay but: • The reporting process will never be instantaneous • Court of Appeal rejected the Claimants' suggestion that the bank should have got advance consent in relation to future transfers 28583144.1

Duty to provide an explanation for refusal to execute payment instructions • HSBC's refusal - based on tipping off provisions • Court of Appeal - not prepared to deal with issue on application for summary judgment But Court thought it was arguable that bank, as agent, was obliged to keep customer informed. 28583144.1

Key Legal Points for Banks • In response to a claim for damages, a bank will need to adduce evidence that it genuinely held suspicion and, probably, the basis of that suspicion (subject to issues of "tipping off" and PII) • An aggrieved customer will have a claim against a bank where: • "Suspicion" is fanciful • "Suspicion" is based on mistaken identification • There has been no "human held suspicion" • The bank has been dilatory • The bank has acted in bad faith 28583144.1

Wider Ramifications • Review of internal AML procedures? • In disclosing the basis of suspicion, bank may, in certain circumstances, be placing itself or its employees at risk of reprisal • Even where the identity of the reporter is redacted, the information giving rise to the suspicion can betray the identity of the reporter • POCA regime undermined if members of staff regard themselves as vulnerable to the risk of reprisal and shy away from their reporting obligations • How can a bank seek summary judgment seeking to dismiss a claim which has no realistic prospect of success or which is frivolous or vexatious or mischievous? 28583144.1

ANY QUESTIONS 28583144.1

Name: Daren Allen Position: Partner and Head of Financial Services Department: Litigation & Regulatory Tel: +44 (0)20 7796 6824 Fax: +44 (0)20 7153 7710 E-mail: daren.allen@dlapiper.com 28583144.1

PROCEEDS OF CRIME ACT 2002Shah -v- HSBC Private Bank (UK) Ltd MLRO's.com Daren Allen DLA Piper UK LLP Tuesday, 2 March 2010

PROCEEDS OF CRIME ACT 2002 Shah -v- HSBC Private Bank (UK) Ltd