Shah v HSBC – civil liability in money laundering
Tuesday 16 February 2010
Following the Court of Appeal's judgement in the case of Shah v HSBC earlier this month, the legal press has been filled with dire warnings that solicitors will have to justify every report they make, with client's given free reign to sue for damages when a transaction is held up awaiting consent.
A closer reading of the judgement would suggest that the situation may not be quite that bad.
Solicitors who appropriately consider concerns of money laundering and ensure that their clients are given proper legal advice as to their own legal position under money laundering legislation should notice little difference in practice.
The facts of the case
Mr Shah transferred funds from his Credit Agricole account to his existing HSBC account. He advised HSBC that there had been a problem with identity fraud and so he was transferring the funds for a short time while the identity issue was resolved.
A few months later he asked HSBC to transfer the funds back to a Credit Agricole account and for other funds to be paid to a creditor.
In both cases he was told that this would be delayed while the bank complied with its UK statutory obligations.
The bank had made a suspicious activity report (SAR) and received consent some days later for the transfer, while the second instruction was cancelled by Mr Shah.
Mr Shah had assets in Zimbabwe and Zimbabwean officials became concerned about the decision by the bank not to release the funds.
About a month and a half after the first SAR had been submitted, Zimbabwean officials demanded an explanation from Mr Shah about the funds. Mr Shah spoke with the bank at this time and was told that he had been under investigation but that this was now completed.
Mr Shah's solicitors sought a further explanation but the bank refused. The Serious Organised Crime Agency (SOCA) advised the solicitors that there was no criminal investigation of Mr Shah.
No further information about the handling of his accounts was provided to Mr Shah and the Zimbabwean authorities proceeded to seize $331 million of Mr Shah's assets.
Mr Shah alleged:
- irrationality
- negligent self-induced suspicion
- mistake
- a breach of duty of care to act promptly and
- a breach of duty to keep him informed as agent.
What the court decided
The court confirmed the test of suspicion as set out in the cases of Da Silva and K Ltd. For the purposes of the Proceeds of Crime Act, a suspicion does not have to be on reasonable grounds, just that the possibility has to be 'more than fanciful'.
The key point to remember, however, is what the suspicion is about. You must hold a suspicion that a person is engaging in money laundering.
It is not sufficient simply to suspect that the client is unusual or that the transaction seems 'fishy'.
While what is colloquially referred to as ‘the smell test' is a useful tool for fee earners; as money laundering reporting officer (MLRO), you must suspect that existing criminal property is involved in the transaction or in a person's possession, before you can form a suspicion of money laundering.
Following Anwoir's case, there are two ways you may form a suspicion of existing criminal property:
- If you know or suspect that a specific type of criminal conduct, such as fraud, tax evasion, drug trafficking, is occurring and you suspect such conduct has generated property.
- If there are such a cluster of warning signs which cannot be satisfactorily explained so that the manner in which you are asked to handle the funds gives rise to an irresistible inference that the funds must be criminal in origin.
The court concluded that if the bank suspected money laundering then Mr Shah had little prospect of success for the actions for irrationality, negligently self-induced suspicion or mistake, because of the low threshold test of suspicion,.
However, the court ruled that a client should be able to require the bank (or law firm) to prove that the suspicion held was of money laundering, rather than a general suspicion that the client posed a reputational risk or that the transaction was simply 'fishy'.
With respect to the breach of a duty of care to act promptly, the court pointed out that even if consent had been sought by the bank to hold the money initially, further consent would be needed to transfer the funds and this could only occur once instructions to transfer the funds had been received.
The court dismissed this aspect of the appeal.
With respect to the question of failing to keep the client updated, the court was of the view that particularly once the moratorium period was completed, the risks of tipping off or prejudicing an investigation must diminish and the common law duty of an agent to account to their principal must begin to regain prominence.
The exact point at which the client is entitled to more information and whether that would have avoided the loss suffered were issues to be considered in a trial, not through summary judgement.
It seems one of the important reasons for the Court of Appeal in allowing the appeal, albeit on limited grounds, was to ensure that there was some judicial oversight of these very draconian laws.
Meeting civil claims effectively
When considering making a suspicious activity report, it is good practice to document why you suspect there is existing criminal property and what acts you suspect constitute money laundering.
The judgement suggests that you will not have to prove that these were true or that they were reasonable, you will merely have to show that you held those suspicions.
The nature of transactions conducted by solicitors mean that while time is normally of the essence, there will often be time to make a report on a suspicious transaction and obtain consent prior to the time for completing the transaction.
Ensuring fee earners advise you of concerns promptly will help you consider making reports in a timely manner and minimise disruption to retainers.
The scope of the tipping off provisions and the prejudicing an investigation provision has been narrowed since December 2007. Solicitors are able to speak with their client about money laundering laws, explain the client's position under those laws and in appropriate circumstances give them advice on how to obtain consent for the completion of transactions.
Where a client is fully advised of their own legal position, they are less likely to be able to proceed on a claim relating to a lack of information. A solicitor does not need to explain their own obligations under POCA to fully advise the client on the client's position.
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