Are you liable to customers for taking its time to verify the source of funds – In the recent related English cases of Shah v HSBC (UK) Ltd [2009] EWHC 79; Shah v HSBC (UK) Ltd [2010] EWHC Civ 31; Shah v HSBC (UK) Ltd [2011] EWHC 1713; Shah v HSBC (UK) Ltd [2011] EWCA Civ 1154; Shah v HSBC (UK) Ltd [2011] EWHC Civ 1669, the English Courts were faced with the question of whether a bank could be liable to its customers for taking its time to verify the source of funds in compliance with its obligations under AML legislation.

A subsidiary issue related to whether the bank was obliged to disclose the identity of its employees who had first raised concerns over the source of funds and whether it was appropriate that the suspicions of such employees be tested at trial under cross examination.

the decision is a useful guide to banks on the policy considerations behind AML legislation and the bank’s duty to abide by such legislation.

The Cases

The Plaintiffs were account holders with HSBC Private Bank (the Bank).

They commenced proceedings against the Bank for damage caused by delays in executing 4 fund transfers from the Plaintiffs’ accounts.

The Bank’s defence was that it suspected that the funds represented proceeds of crime and hence, the Bank could not proceed with each of the transactions until after disclosures were made to the relevant authorities and the appropriate consents were given under the relevant English regulations.

The Plaintiffs then sought disclosure of the names of the bank officers who were involved and sought to challenge the rationale behind their suspicions that the monies may have represented proceeds of crime. In particular, they sought to show that the suspicion was “self-induced”, “mechanical” and “not rational”.

The English Courts dismissed the Plaintiffs’ claims and their subsequent application to amend their claim. The English Courts also refused the Plaintiffs’ attempts to seek disclosure of the Bank’s employees’ names.

In so doing, the English Courts made the following important statements:

1. A bank is not liable in negligence when it acts to fulfil its statutory obligations in respect of AML legislation;
2. A plaintiff complainant cannot seek to challenge a bank’s employee’s suspicions that monies transferred to the bank may be proceeds of crime unless there is clear evidence of bad faith; and
3. A bank had no obligation under the litigation disclosure rules in England to disclose the names of its employees involved and was entitled to redact the identities of individual employees.

Ultimately, the English Courts recognised that the Plaintiffs were on a fishing expedition in seeking various disclosures from the Bank and its employees and seeking to make the knowledge or motives or such employees an issue at trial.

The English Court of Appeal therefore disallowed the Plaintiffs’ applications.

Important observations

The judgments in the inter-related cases allow banks and financial institutions to perform their statutory obligations without fear of being sued for delays which may result from procedures taken to comply with such statutory obligations.

They also highlight that a bank and an individual employee’s suspicion cannot be made the subject matter of such a negligence suit unless there is clear evidence of bad faith.

The observations are timely and comforting to banks and financial institutions.

The AML regime relies on the willingness of members of the bank’s staff to report their suspicions to the relevant authorities.

Historically, they have done so on the basis that anonymity would be maintained vis-à-vis the bank’s customers.

The effectiveness of this system will be diminished considerably if members of staff regard themselves as vulnerable to the risk of reprisal and shy away from their reporting obligations