Case of the week: Banking and finance
11 June 2012
31 October 2013
24 January 2014
3 July 2014
24 January 2014
9 April 2014
Where a bank suspected a customer of money laundering, an implied term in the bank-customer contract permitted it to refuse to execute a payment instruction pending permission from the Serious Organised Crime Agency (Soca) under the Proceeds of Crime Act 2002 (Poca). Moreover, the bank was not obliged to provide the customer with details of its disclosure to the agency. Where the provision of that information might amount to a ‘tipping-off’ offence, the bank was obliged to refuse to provide it.
Judgment for the defendant
Jayesh Shah and Shaleetha Mahabeer claimed damages from HSBC Private Bank for breach of contract.
The claimants were account holders who had business interests in Zimbabwe. On four occasions over a seven-month period they instructed the defendant to transfer monies totalling more than $28m (£18.2m) from their account. The bank suspected that the funds were criminal property so it felt obliged under Poca to make a ‘suspicious activity report’ to Soca.
Once permission had been granted, it made the transfer.
The bank explained delays in the transfers by saying it was complying with its statutory obligations.
Shah claimed that the delays had caused suspicion resulting in the seizure of their assets in Zimbabwe and the loss of more than $330m.
It was alleged that the bank was in breach of contract in failing to process payment instructions promptly and in failing to explain the delays. The bank should have explained why the delays were caused, it was claimed.
The issues were whether the delays caused any loss to the claimants and if the bank had any duty to provide the information sought.
The defendant argued that a term in the bank-customer contract allowed it to refuse to process the payment without permission from Soca if money laundering was suspected.
It denied that it was under any duty to provide the information to the claimant, but argued that if it was under any duty then it was negated by its obligation to refuse to provide such information when to do so might break a legal or other duty.
Judgment for the defendant
The reporting regime under Poca made inroads into a bank’s contractual duty to comply with customer instructions, intervening in a way that might cause the customer prejudice. That was a price that Parliament had deemed worth paying in the fight against money laundering.
That balance required a term to be implied into the contract between them permitting the
bank to refuse to execute the customer’s payment instructions in the absence of permission where it suspected that the transaction constituted money laundering.
The next question was what constituted ‘the bank’ for the purposes of that suspicion. In the instant case, it was the defendant’s ‘nominated officer’ who decided, autonomously and independently, whether to submit suspicious activity reports.
It did not matter that he had been appointed by the defendant’s parent company rather than by the bank directly.
The defendant’s delay was not the cause of Shah’s loss.
The bank had not been obliged to give the claimants the information they sought.
The contract between them contained no implied obligation to provide such information.
Had there been any obligation to provide information to the customer, it would have been a qualified one.
On the facts available to the defendant at the time there was a risk of criminal liability, and it had therefore been entitled not to provide the information sought.
In any event, the defendant’s failure to provide Shah with the information they sought had not caused their losses, which they had, moreover, taken no steps to mitigate.
For the claimant
Paul Downes QC, 2 Temple Gardens
Joseph Sullivan, 2 Temple Gardens
Colin Joseph, Edwards Wildman Palmer
For the defendant
Richard Lissack QC, Outer Temple Chambers
Nicholas Medcroft, Outer Temple Chambers
Daren Allen, Berwin Leighton Paisner
Commentary: Clare Baker
The implications of Shah v HSBC are wide-reaching. Not only does the decision affect the interpretation of banking contracts, it also provides some much-needed clarity as to the ambit of money laundering offences under the Proceeds of Crime Act (Poca).
With respect to implied terms in banking contracts, the law permits banks to refuse to execute payment instructions in the absence of ‘appropriate consent’ under s.335 of Poca where the bank suspects that the transaction constitutes money laundering; and refuse to provide details of reports it makes to the Serious Organised Crime Agency (Soca), whereby providing such information might contravene duties under Poca
s.333 and/or s.342.
Although exclusion clauses contained in banks’ standard terms and conditions may be effective, it should be noted that in the event of litigation they will need to satisfy the requirement of reasonableness.
The court held that a bank may refuse to effect a payment instruction if the nominated officer had an “honest and genuine” suspicion that the relevant funds were criminal property at the time of each report made to Soca. Records should be kept of the nominated officer’s justification for making the report.
On ‘tipping off’, where information regarding a failure to pay is requested by a customer, banks will need to assess the facts at the time that information is requested in order to ascertain liability for the tipping off offence under Poca. The bank should not provide information if there is a possibility of the offence being committed.
Clare Baker, barrister, Outer Temple Chambers