* What are the key issues in the case? * Outline the decision of the court * Evaluate what practical guidelines can be taken from the case by regulated financial services firms Under the proceeds of crimes act 2002 (POCA) all UK financial institutions and other regulated firms not only have to report suspicions of money laundering but they must also seek consent from the Serious Organised Crime Agency (SOCA) to carry out any transactions which they suspect are related to the proceeds of the crime.
SOCA have a maximum of 7 working days with which to respond to any Suspicious Activity Report (SAR) and until the reporting firm receives actual or deemed consent under the legislation, it must not complete their customer’s instruction without the risk of committing a criminal offence. (See SOCA website http://www. soca. gov. uk/about-soca/the-uk) Background Mr Jayesh Shah was a Zimbabwe-based business man with business interests in a range of countries including Central Africa. He opened his accounts with HSBC in 2002.
Between September 2006 and February 2007, 4 separate transactions, totalling $38,177, 582. 69 were delayed by HSBC. Date of payment instruction| Amount to be transferred| Date of authorised disclosure (SAR)| Date of consent| Date transfer effected| 20th September 06| $28,807,432. 88| 21st September 06| 2nd October 06| 3rd October 06| 26th September 06| $7,282. 50| 28th September 06| Not applicable (payment instructions were cancelled on 29th September 06)| Not applicable| 6th February 07| $8,904,910. 65| 7th February 07| 14th February 07| 15th February 07| 28th February 07| ?
457,956. 66| 28th February 07| 2nd March 07| 5th March 07| Mr Shah approach HSBC requesting an explanation as to the delays in the payments to which the response was that they were “complying with its UK statutory obligations”. When Mr Shah advised one of the payment beneficiaries what he had been told, rumours that Mr Shah was suspected of Money laundering in the UK quickly got out. Later Mr Shah was also to be advised by the head of HSBC Africa that an investigation into his affairs had indeed taken place but was now completed.
Mr Shah requested sight of all of the supporting documentation but was refused on the grounds that they could be construed as ‘tipping off’. In 2008 Mr Shah initiated a claim against HSBC for alleged losses of more than $300m. Mr Shah claimed that when the funds had been frozen, not only was he unable to advise the beneficiaries of the fund the full details of their delay, but also the Reserve Bank of Zimbabwe became concerned that he may have been involved in money laundering and as a result froze and then seized his assets.
Mr Shah claimed he had sustained losses in the region of $330m, which he believed were recoverable from HSBC on the basis that the bank was in breach of contract for failing to complete the transactions properly or to fully explain the delays. He also claimed that the reasons for the suspicions themselves were ‘irrational, negligently self-induced and mistaken and it required that HSBC had to prove the suspicion’ The court battle itself was very long and protracted. Initially HSBC won the right to seek summary of judgement in 2009 and the case was dismissed for all of Mr Shah’s claims.
However Mr Shah appealed in 2010 on the basis that the claim was not sufficiently straightforward to be summarily dismissed and won the right to appeal. The Decision Finally on the 13th October 2012, after 27 days of trial the High Court of Justice dismissed all of Mr Shah’s claims and found in favour of HSBC. This was considered a landmark decision and had been widely observed across the banking industry as the repercussions (regardless of the outcome) would be fundamental in the ongoing work undertaken by banks and other financial institutions relating to Ant-Money Laundering activities.
In dismissing claims for breach of contract and breach of confidentiality the Court said banks do not need reasonable grounds before making a suspicious activity report. The Court also stated that a claimant would have to demonstrate the bank had acted in bad faith before civil liability would be entertained. In its decision the Court of appeal did make reference to the dual pull on Banks in having to comply with the heavy demands of a regulator whilst mitigating civil actions from potentially disgruntled customers.
It also made reference to a previous court case (De Silva v NatWest Bank 2006) where the court made specific reference to the meaning of the word ‘suspect’. Here, in relations to the claim by Mr Shah that the reason for the suspicion itself was irrational, negligently self-induced and mistaken, the court confirmed that HSBC merely had to think that there was a possibility, which was more than fanciful, that the relevant facts exist when completing its SAR. On a wider note the Court also deemed that in the future having a suspicion may constitute a good defence for Banks.
The subject of tipping off can be one of the most ambiguous subjects within financial organisations. There are clear laws that have financial and punitive repercussions for those who recklessly or mistakenly divulge the suspicions of the firm they are working on behalf of. The court here ruled that the use of the legislation surrounding tipping off cannot be endlessly relied on when declining the request of information from customers. An approach where an organisation carefully considers if the supply of information would risk or prejudice a request or submission should instead be used.
In this example, once HSBC had completed its investigations on Mr Shah, it would not have constituted tipping off, had they disclosed the nature of their suspicions at that point. The Appeal Court had high praise for Money Laundering Reporting Officer (MLRO) for HSBC, they described him as a ‘patently honest witness’ but more importantly were incredibly impressed by the way in which he was able to articulate the reasoning behind his suspicions and how he ensured that his approach to the submission of SAR’s were fully considered.
He explained a 3 tiered ‘absorb, investigate, reflect & decide’ rational that had the full endorsement of the court. Conclusion The decision of the Courts here could be somewhat of a double edged sword. On the one hand regulated financial services can breathe a sigh of relief that they will not be open to a raft of civil suits if any client’s transactions are delayed in a similar way. They specifically can take heart from the ongoing assurance that suspicion itself still does not need to be proven beyond reasonable doubt.
However the strength of HSBC’s defence was reliant largely on the soundness of its MLRO and the systems that were in place in the bank when submitting this SAR. Regulated firms should be mindful here that any inadequacies in a company’s SAR reporting process, its decision making process or competence of staff could be heavily scrutinised and if held up against this as a test case, those who fall short could fall foul to civil action. Also the court ruling around the discloser of information being made under the pretext of tipping off is worryingly ambiguous.
Where a firm could reasonably withhold what they deemed to be sensitive information previous they must now put consideration into whether there is a time when this can and can’t be done to warrant the risk of civil action. Overall, it is the regulated financial services that have come out the worst in this fight. Although it has provided clarity on what is permissible, the increased level of scrutiny will leave them having to expand the workforce in this space even further.