HSBC wins $300 million Shah claim – Businessess and their MLROs have welcomed a London High Court decision that saw wealthy Zimbabwean businessman Jayesh Shah fail in his $300 million claim against HSBC Private Bank. This HSBC case has been running for four and half years and has already been the subject of six reported decisions and three hearings before the Court of Appeal.
Yesterday’s judgment is a relief to banks and money laundering reporting officers (MLROs), who feared the impact of a Shah victory on overhauling their processes for suspicious activity reporting. Firms, and in particular banks, are often placed in the unenviable situation of trying to balance their obligations under POCA against the maintenance of a commercial relationship with customers.
This robust decision brings a welcome relief for firms who feared they may be liable for damages simply by complying with their legal obligations under POCA.
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The case has been closely watched by other banks who were concerned that they could be exposed to legal action by customers for simply complying with their obligations under the Proceeds of Crime act.
Mr Justice Supperstone ruled in favour of HSBC and dismissed a $300m claim for damages brought by Jayesh Shah and his wife, who have business interests in central Africa and Zimbabwe.
The long-running case centred around Mr Shah, a customer with HSBC Private Bank for eight years, who transferred $28m to his HSBC account in London from an account at Crédit Agricole, the French bank. When he tried to transfer most of the money back to Crédit Agricole in 2006, he was told by HSBC that “it could not effect the transaction because it was complying with its UK statutory obligations” as the bank had made a Suspicious Activity Report to a regulatory authority.
In each case HSBC told Mr and Mrs Shah that it was complying with its statutory obligations but declined to provide any further information to them or their solicitors.
The couple alleged they were stigmatised in Zimbabwe and suspected of criminal activity because of HSBC, causing authorities there to freeze and seize their assets. Mr Shah denied any involvement in money laundering and the transfers eventually took place.
The ruling found that it was not HSBC’s delay in executing the payment instructions and its failure to provide information but the Zimbabwean authorities’ own pre-existing or independent concerns that led to the losses by the claimants.
Mr Justice Supperstone also said in his ruling that
- “in my judgment Mr Shah was able to, but did not, take reasonable steps to mitigate or avoid his loss”.
Daren Allen, partner at Berwin Leighton Paisner, who acted for HSBC in the case, said there had been considerable debate about the obligations owed to the customer of a bank when it had made an SAR to the SOCA. He said the court decision would
- “be welcomed by firms who feared they may be liable for damages for simply complying with their legal obligations under the Proceeds of Crime Act”.
FULL BRIEFING
Landmark decision in Shah v HSBC Private Bank brings welcome relief for firms
Introduction
After four and half years, six reported decisions, three trips to the Court of Appeal and 27 days of trial, the High Court of Justice has today dismissed in its entirety Mr Shah and his wife’s claim for over US$300m against HSBC Private Bank (UK) Limited.
This is a landmark decision that confirms a bank’s right to delay execution of a customer’s payment instructions and refuse to provide information in circumstances where the bank has a suspicion of money laundering that has been notified to the Serious Organised Crime Agency (“SOCA”).
What has happened?
Mr and Mrs Shah (the “Claimants”) were customers of the Bank. Between 20 September 2006 and 28 February 2007, the Bank delayed the execution of four separate payment instructions given by the Claimants, including an instruction to transfer approximately US$28 million.
The reason for the delay was that the Bank held a suspicion that the funds in the Claimants’ account were criminal property and it had therefore made an authorised disclosure to SOCA seeking consent to make the payments.
In each case, whilst the Bank was waiting for a response from SOCA (SOCA has 7 working days to respond), 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. Once consent had been given, the Bank complied with the payment instructions except for one instruction which the Claimants had previously cancelled.
The Claimants lodged a claim against the Bank for breach of contract contending that the Bank’s failure promptly to carry out the payment instructions and to explain the reasons for not doing so had caused them substantial losses (over US$300m) in Zimbabwe.
It was alleged that, upon hearing rumours that Mr Shah was suspected of money laundering in the UK, the Zimbabwean authorities became suspicious, froze and then seized Mr Shah’s assets.
At trial the court was required to consider the following key questions:
1.Did the Bank suspect money laundering?
2.Did the Bank have a duty to provide information about the delay?
Mr Justice Supperstone of the Queen’s Bench Division rejected the Claimants’ claim in its entirety and made the following findings:
1.Did the Bank suspect money laundering?
- Suspicion –
- the Bank’s nominated officer honestly and genuinely suspected that the Claimants’ funds were criminal property. The Judge rightly rejected the Claimants’ argument based on a previous authority that the suspicion must be of a settled nature. The Judge held that this formulation is only applicable in limited circumstances and, in any event, the Bank’s nominated officer did have a settled suspicion.
- The need for an implied term – Parliament in enacting the Proceeds of Crime Act (“POCA”) has struck a precise and workable balance of the conflicting interests. This requires a term to be implied into the contract between a banker and his customer to permit the bank to refuse to execute a payment instruction in the absence of consent from SOCA where it suspected the transaction constituted money laundering.
- Attribution question –
- the Bank’s nominated officer (who was employed by HSBC Plc and not the private bank Defendant) constituted the Bank for the purpose of the Bank holding the relevant suspicion because he exercised management and control over decisions, had autonomy when making decisions, and finally exercised his judgment independently.
2. Did the Bank have a duty to provide information about the delay?
The Bank was not under a duty to provide the Claimants with the information sought (which included SOCA reference numbers and documentary evidence). The Judge rightly noted in his judgment that such a duty would be unworkable in practice because banks are unlikely to know whether the provision of information might constitute ‘tipping off’ under POCA. Further, the Defendant was obliged to refuse to provide the information because, on the facts, the disclosure was likely to amount to ‘tipping off’.
In any event, the Judge held that it was not the Bank’s delay in executing the payment instructions and/or failure to provide information but the Zimbabwean authorities own pre-existing or independent concerns that caused the Claimants’ losses.
The Court also held that the Claimants did not take steps to mitigate their loss and the actions taken by Mr Shah’s ex-employee (in reporting Mr Shah to the police) and by the Zimbabwean authorities were not foreseeable.
What are the consequences of the decision for firms?
- Appointment of the nominated officer –
- whilst the absence of a formal appointment is not fatal, the appointment of a nominated officer should be properly documented;
- Suspicion –
- an aggrieved customer will not have a claim in relation to delay of payment instructions if the reason for delay is a genuine and honest suspicion of money laundering held by its nominated officer.
- However, a claim may be made against a firm where the suspicion is fanciful; based on mistaken identification; made in bad faith; where the firm has been dilatory; or where the suspicion was not ‘human held’;
- Documentation –
- firms should produce and retain clear and comprehensive written records of why they suspect money laundering. Ideally, all relevant supporting information will be recorded in the disclosure made to SOCA.
- Tipping off –
- firms should continue to refuse to provide any information to customers which might amount to tipping off under POCA.
- Terms and Conditions –
- a firm’s standard terms and conditions should seek to expressly exclude liability where a customer suffers loss as a result of both a delay in the execution of its payment instruction and/or the firm’s refusal to provide information regarding its refusal to execute the instruction.
- Such terms may, however, be challenged on grounds of reasonableness.
http://www.blplaw.com/index.cfm/Hot_Topics_Legal_Updates/1365/element/89742
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