Shah v. HSBC - Part 2 Relief for Financial Institutions and Businesses
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ARTICLE
Shah v. HSBC – Part 2 Relief for Financial Institutions and
Businesses
Shah v. HSBC Private Bank (UK) Limited [2012] EWHC 1283 (QB)
Judgment delivered 16 May 2012
BY ROBYN WOOD
The latest High Court decision in this long- Case Summary
running case should provide relief for This is the sixth reported decision in this case which
businesses who feared that complying with has been ongoing for four and a half years. It has seen
their legal obligations under statutory Anti- lawyers questioning almost every aspect of how the
Money Laundering (AML) regimes might Proceeds of Crime Act 2002 (POCA) of England
render them liable for damages for any losses and Wales should function in practice and what its
alleged by their customers. application means both to financial institutions and
their customers.
The decision clarifies how duties to customers and
AML obligations should interrelate. It also provides Mr Shah, a customer of HSBC in London,
guidance on the appointment of Money Laundering conducted a business of lending money to banks and
Reporting Officers (MLRO), and the approach other institutions in Zimbabwe. Between September
which they should take in considering whether to 2006 and February 2007 HSBC delayed executing
make an authorised disclosure to a supervisory body, four separate payment instructions from Mr Shah
such as by way of a Suspicious Activity Report because of a suspicion that the funds were the
(SAR) to the Serious Organised Crime Agency proceeds of crime. HSBC made an SAR to SOCA
(SOCA) in England and Wales, or a Suspicious each time Mr Shah made a request and waited for
Transaction Report (STR) to the Financial Crime authorisation from SOCA before processing the
Unit (FCU) in the Isle of Man. requested payments, as required by POCA.When questioned about the delay HSBC told Mr implement the instructions of their customers, if to
Shah that it was complying with its statutory do so would constitute a criminal offence and a
obligations but did not provide him or his solicitors breach of AML obligations there is no such duty on
with any further information. The intended recipient the bank to process the payment. A bank’s
of one of the delayed payments informed the obligations under POCA override duties it would
Zimbabwean authorities that Mr Shah’s account had otherwise owe to its customers.
been frozen and subsequently the Zimbabwean
authorities froze and seized Mr Shah’s investments in Who was the ‘Nominated Officer’?
Zimbabwe when he was unable to provide details of The judge considered who, in a case where the
the UK investigations. defendant corporation is part of a global group,
constituted the defendant when asking the question
Mr Shah brought proceedings against HSBC of whether the defendant had the requisite level of
claiming that they had breached their duties to him suspicion to make an SAR in good faith and cause
by not complying with his instructions to make the processing of payments to be delayed until
payments and by failing to provide him with SOCA gives its consent.
information about the SARs. He further alleged that
HSBC acted on suspicions that were mistaken, In this case the MLRO who made the disclosures to
irrational and negligent, so the reports to SOCA SOCA, Mr Wrigley, was not employed by the
should never have been made. Mr Shah claimed that subsidiary of the Bank named in the proceedings, but
the Bank’s alleged breach of duties had caused his by its parent company. The MLRO for the whole
assets in Zimbabwe to be frozen and resulted in losses group, including the defendant subsidiary, had
of over US$300 million. delegated to Mr Wrigley the role of Nominated
Officer for receiving authorised disclosures from
Findings of this judgment HSBC did not commit a employees relating to money laundering offences
breach of their duties to Mr Shah by not processing made under POCA in respect of all HSBC
the payments. Mr Shah asserted that HSBC had a operations in the UK. The judge criticised the Bank
contractual obligation to act on his instruction and for not properly documenting this appointment and
effect the four transactions. The judge decided that delegation, but as it was understood by Mr Wrigley,
POCA acted to imply a term into the Bank’s the Bank and the Bank’s employees that he was the
contract with Mr Shah to the effect that it could Nominated Officer that was sufficient to determine
refuse to execute instructions in the absence of who the Nominated Officer was. The judge also
appropriate consent from SOCA where it suspected found that Mr Wrigley exercised management and
that a transaction constituted money laundering. This control over decisions to make an external SAR, had
means that, whilst banks should normally act to autonomy in making these decisions and exercisedhis judgment independently. The question was Mr Shah contended that the Bank had an implied
therefore whether Mr Wrigley had the right level of duty to provide him with information when he asked
suspicion to make a SAR and cause the payments to for it and to keep him as a customer informed of the
be delayed. reasons why his instructions could not be complied
with. Mr Shah had asked for the name of the
What Approach Should an MLRO Take? authority to whom the disclosure was made, SOCA
The judge confirmed the subjective test for suspicion reference numbers, copies of consents, the primary
given in the case of R v. Da Silva [2007] 1 WLR facts which caused the disclosure to be made and
303: “the defendant must think that there is a possibility, documentary evidence of this.
which is more than fanciful, that the relevant facts exist. A
vague feeling of unease would not suffice”. He also The Bank refused to provide the requested
reconfirmed the findings of K Limited v. National information as they believed that to do so may
Westminster Bank plc [2006] 4 All ER 904 that constitute a criminal offence under either s.333 or
there is no legal requirement that there should be s.342 of POCA. These sections create offences where
reasonable grounds for suspicion. Therefore there a person who knows or suspects that an authorised
could be no legal argument that a suspicion is disclosure has been made, or that an appropriate
mistaken, irrational or negligent; what is important is person is acting in connection with an investigation
that it is truly held. into a money laundering offence which either is or is
about to be conducted, makes a disclosure likely to
The judge noted how useful it would have been if prejudice any investigation that is being or is likely to
Mr Wrigley had made a contemporaneous note of be conducted following that disclosure.
the reasons leading him to make the SAR, as this
would have made it easier for him to prove that he The judge found that banks would not be in a
acted with sufficient reasoning. The judge supported position to know whether disclosures they had made
the three-stage process adopted by Mr Wrigley for had, or would, trigger an investigation and therefore
deciding whether to make an SAR. Absorbing whether providing such information might constitute
information sent to him as nominated officer, an offence under s.333 or s.342 of POCA.
investigating the concerns escalated to him and
reflecting upon the information and deciding Further, the judge stated that to put a duty on banks
independently whether to make an SAR. to tell customers about disclosures they make about
their accounts would act as a disincentive to report
Not providing information to Mr Shah did not suspicious activity and so undermine the integrity of
breach HSBC’s duties to him and was the correct the reporting regime.
approach to avoid committing a tipping-off offence.Consequently no such implied term was imposed on honest suspicion of money laundering, a customer
HSBC and the bank was said to have acted correctly will not have a claim for losses this may cause.
in not revealing information which it felt would be However this will not hold true if the suspicion is
tantamount to a tipping-off offence. Instead the fanciful, made in bad faith or not independently
judge found that “if, on the facts available to the bank at formed by the nominated officer. It is best practice to
the time of the request, there is a risk of “tipping-off”, then document all steps taken when making decisions
to avoid potential criminal liability it must refuse the whether to make STR. Record the basis for the
request”. suspicion and put those influencing factors into the
STR to defeat any allegations of reporting in bad
This part of the judgment acts to create an implied faith which may later arise. Whilst the absence of
term into banking contracts that permits banks (their formal appointment of a nominated officer does not
employees and agents) to refuse to provide invalidate his appointment or the work he does, it is
information where they believe that in providing that advisable to properly document this. Do not provide
information they may contravene POCA by way of any information to customers that might amount to
tipping-off or prejudicing investigations, and so tipping off. Requirements under POCA override any
expose them to criminal liability. such obligation that could be said to be owed to a
customer. Draft terms and conditions of customer
Having found that HSBC acted correctly by making contracts with AML obligations in mind. The judge
the SARs, not making the payments and not in the Shah case noted that clauses exempting liability
providing information to Mr Shah, and having found for damages caused by complying with legal
that even if it had provided the information as requirements which were drafted into HSBC
requested this would not have stopped the alleged contracts would be unenforceable if the bank failed
losses caused by the Zimbabwean investigation, there to show them to be reasonable and did not
were no grounds on which Mr Shah could claim sufficiently bring them to the notice of the customer.
damages.
What this Means for Financial Institutions and
Businesses
A number of lessons can be learned from the Shah
case which have a much wider application to
financial institutions and all businesses concerned
with how to implement AML requirements. Where
a bank delays carrying out payment instructions
because its nominated officer has a genuine andROBYN WOOD
Counsel
rwood@applebyglobal.com
This publication is intended only to provide a summary of the subject mattered covered. It does not purport to be
comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication
without first obtaining specific professional advice.
July 2012
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