Shah v HSBC Private Bank UK Limited Filling the Legislative Gaps 2-8-12

8/10/2019 Shah v HSBC Private Bank UK Limited Filling the Legislative Gaps 2-8-12

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Butterworths Journal of International Banking and Financial Law July/August 2012 407

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Shah v HSBC Private Bank (UK) Limited:flling the legislative gapsINCOMPLETE STATUTORY

PROTECTION UNDER THE CONSENT

REGIME

Te spectacle of the long litigation

between Mr Shah and HSBC

(judgment at trial [2012] EWHC 1283 (QB)

May 2012)should give cause for serious

concern. On the one hand, Mr Shah was a

private individual suing his bankers, HSBC

Private Bank (UK) Ltd, for massive damages

that he claimed were caused by suspicious

activity reports (SARs) made by the bank tothe UK Serious Organised Crime Agency

(SOCA). Te consequence was that certain

substantial transfers he had directed to be

made by the bank were interrupted and

delayed (albeit briefly). He complained that

(among other things) the bank had failed to

comply with his instructions in breach of the

contract of mandate. Te bank responded

contending that responsible officers of the

bank had formed the requisite suspicion of

money laundering that required reports to

be made to SOCA in accordance with the

anti-money laundering provisions under theProceeds of Crime Act 2002 (POCA). In that

respect, the bank contended, it was merely

complying with the anti-money laundering

legislation. Te penumbra of other issues

and factual allegations matter less than the

fact that it became clear, at an early stage,

that Mr Shah was quite innocent of any

wrongdoing and the suspicions that the bank

entertained accordingly not borne out in fact.

For the bank s part the judge at trial accepted,

contrary to Mr Shahs contentions, that the

bank was conscientiously (not negligently)seeking to apply the money laundering

legislation even though as it turned out its

suspicions were unwarranted. (It appears that

the banks money laundering reporting officer

was cross-examined over a period of six days in

establishing this.) Tat hundreds of thousandsof pounds in legal fees should be incurred

by an innocent party suing their bank that

itself was (as found) conscientiously seeking

to apply the money laundering legislation

should give pause for reflection. Apart from

raising questions as to the meaning and effect

of the legislation, it is a further example of the

significant cost and expense of the anti-money

laundering legislation that is borne by the

private sector as a result of provisions being

insufficiently worked through before being

enacted (originally in 1993 below).

A curious and unique feature of the anti-money laundering regime as implemented

in the UK is the so-called consent regime.

It is illegal for a person to proceed with a

transaction (arrangement) that involves

property that is suspected of representing

(wholly or partly) the benefit from (any)

criminal conduct and where the property in

question does represent such a benefit. Such

conduct need not be serious criminal conduct

and, further, the relevant property may be

derived from conduct that occurred overseas

but which would constitute an offence had therelevant conduct occurred in the UK. echnical

(including regulatory) and strict liability

offences are, surprisingly perhaps, sufficient to

give rise to money laundering offences. Tere

is no requirement for criminal intent. All that

is necessary is that the state of mind necessaryto constitute suspicion should have existed at

the relevant time in point of fact. Tere is no

requirement that suspicion be reasonable.

Te key to the consent regime is that each

of the three substantive money laundering

offences (ss 327329) is provided with a

specific statutory defence where a report

of suspicion is made to the SOCA as soon

as practicable (known as an authorised

disclosure) and beforeproceeding with the

transaction (the "prohibited act") consent is

given by SOCA to do so. Tere are two periods

in which a transaction may be effectivelysterilised as a result of delay pending such

consent being given: first, an initial period of

seven days, called the notice period within

which SOCA must either give or refuse

consent, and if this is not done consent is

deemed to have been given; second, a further

31-day moratorium period where nothing

may be done to progress the arrangement if

within the notice period SOCA declined to

consent to the transaction proceeding. Tat

period runs from the date on which consent

is declined by SOCA. In the absence of acourt (restraint) order, after the expiry of that

further period consent to the transact ion is

deemed to be given. (In the overwhelming

KEY POINTS

In Shah v HSBC Mr Justice Supperstone was required to address the dilemma for banks

of (i) the risk of committing a criminal offence if suspicion is entertained but no suspicious

activity report (SAR) is made where suspicion is subsequently shown to have been well

founded and (ii) being sued if suspicion of money laundering isreported but turns out to

be unfounded. Te Proceeds of Crime Act 2002 (POCA) itself, remarkably, provides no

protection against a claim for damages for an unfounded SAR.

Supperstone J held there to be an implied contractual term under the contract of mandate

that relieved a bank (and presumably another reporter) of its obligation to comply with itscustomers instructions once it had reported its suspicion of money laundering as provided

for under POCA. In reaching that conclusion the judge said that POCA represents a

workable balance between competing interests. Tat view, previously expressed by the

Court of Appeal, may not be universally endorsed.

This article considers the recent first instance judgment in Shah v HSBC[2012]

EWHC 1283 (QB), in which Mr Shah at trial failed in each of the claims made by him

against the bank, and questions: (i) whether the workable balance struck by the

Proceeds of Crime Act 2002 in relation to the consent regime is quite as obvious as

the judge held it to be; (ii) whether the implied term identified by the judge might be

unjustifiably broad in its scope; and (iii) whether it is obvious that the consent regime

under POCA is effective in securing the objects of the policy to which it gives effect.

AuthorPaul Marshall


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number of cases consent is given by SOCA

within a few days of a report being made.)

A maximum penalty of 13 years

imprisonment for conviction on indictment for

money laundering (where the transaction later

turns out, as was suspected, to have involved

property that represented a benefit from

criminal conduct) operates as encouragement

to banks and others involved in financial and

other property transactions to report their

suspicions to law enforcement agencies and to

wait for the appropriate consent to be given.Te legal effect of the requirement to

report suspicion, together with the statutory

prohibition on proceeding with a transaction

(arrangement under POCA s 328) involving

a benefit suspected to be derived from any

criminal conduct where such suspicion is

properly founded is that the transaction in

question, pending consent, is frustrated by

supervening statutory illegality. Both parties,

pro tem, are relieved of any further contractual

obligation.

Te point is that it is an offence to proceedwith a transaction suspected of involving

property representing a benefit from criminal

conduct but onlywhere the property is not

only suspected of representing a benefit from

criminal conduct, but also does in factrepresent

such a benefit. As the Court of Appeal has

recently pointed out, it is not the suspected

transaction that taints the property but rather

the original underlying (or predicate) offence:R

v Geary [2011] 1 Cr App R 8.If the property

in question is untainted by crime, however

much the facts may give rise to suspicion of

money laundering, it is not unlawful, under theterms of POCA, to proceed with a transaction.

Te corollary of this is that, in the absence

of any statutory defence being provided,

and there is none, contractual obligations

are not suspended under the legislationwhere

a transaction is incorrectly/unjustifiably

suspected of involving property derived from

criminal conduct. Te simple rationale for this

position is that money laundering can only

involve criminal property.

Te foregoing gives rise to the

extraordinary, and presumably unintended,effect that anyone participating in a transaction

by advising or otherwise acting for a client, is

on the one hand subject to draconian criminal

penalties should they proceed without the

requisite consent with a suspected transaction

which turns out, as suspected, to involve

criminal property; on the other hand, if the

property in question is untainted by crime

(that is, it does not represent a benefit from

criminal conduct) and a report is made, the

reporter is exposed to claim for damages should

the suspension of a transaction cause loss or

damage to the person suspected of money

laundering. As noted in [2010] 5 JIBFL 287,

given that, contrary to what was previouslythought to be the position, a bank or other

reporter can be required to prove at trial the

fact of suspicion, the invidious choice for banks

(and other reporters) appeared to be a balancing

of risk between committing a criminal offence

if suspicion was entertained but no SAR made

and suspicion subsequently was shown to

have been well founded, and being sued for

damages if suspicion was reported but turned

out to be unfounded. It is difficult to see this

legislative position as being other than bad law.

It was this conundrum, and the completeabsence of any statutory protection afforded

to a person whose suspicion turns out to have

been unfounded against a claim for breach of

contract, that was required to be considered

by Mr Justice Supperstone at the eventual

trial, after years of interlocutory skirmishing

(including several trips to the Court of

Appeal), in Shah v HSBC. (An added difficulty,

beyond the scope of this article, is the statutory

inhibition on reporters against their providing

information to the subject of an SAR for fear

of doing so constituting the separate offence of

prejudicing an investigation.)

AN IMPLIED TERM TO THE RESCUE?

Te defendant bank contended for the

existence of an obvious or necessary contractual

term to be implied in the contract of mandate

to the effect that the bank was entitled to

refuse to execute payment instructions in

the absence of appropriate consent from

SOCA where it suspected the transaction in

question constituted money laundering. Te

judge referred to the principles for implying a

contractual term identified in Attorney-Generalof Belize v Belize Telecom [2009] 1 WLR 1988.

Te judge further relied upon a judgment in an

earlier application in the same litigation where

Mr Justice Hamblen had said: ...where the

bank has a relevant suspicion that the property

is criminal property it has no alternative but to

seek appropriate consent under POCA. Te

bank is most unlikely to be in a position to

know whether or not the property is criminal

property, but, if it suspected that it is, then

in order to avoid potential criminal liability

under POCA it must make a disclosure and

seek appropriate consent. Analytically this

may be legally permissible as the result of an

obvious and/or necessarily implied restrictionon or qualification of the banks duties rather

than on grounds of illegality, but the end result

is the same. Te judge concluded his short

consideration of the arguments in relation to

an implied term: ...I am led to the conclusion

that the term for which the Defendant

contends is to be implied by reason of the

statutory provisions. In my judgment the

precise and workable balance of conflicting

interests in POCA that Longmore LJ noted

in K Limited [[2007] 1 WLR 311] Parliament

has struck [...] requires the implication of thisterm in the contract between a banker and his

customer. It was common ground that there

was no precedent for implying a term to this

effect. (It is fair, also, to note that Lord Justice

Longmores approval of the balance struck by

Parliament under POCA was made in the

specific context of his reference to the seven-

day notice period and 31-day moratorium

period in contrast with the position under

the Criminal Justice Act 1988 under which no

such time limits were provided for. Longmore

LJ suggested that the recognised interference

with freedom of trade was therefore, in hisview limited.)

With respect, Supperstone Js analysis of

the implied term is not free from difficulty.

Objections to the term contended for by the

bank being implied (as a matter of fact) were

put on behalf of Mr Shah on several bases. In

summary these were: (i) that it could not be

assumed that any term should not be limited

to exclude circumstances where the bank was

negligent; (ii) that the term contended for did

not satisfy the requirement of obviousness

because it only arose as a result of a lateamendment by the bank; (iii) that any term that

had the effect of insulating a party from the

consequences of its own (alleged) wrongdoing


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did not satisfy the requirement that any implied

term be equitable and reasonable; (iv) that

any term formulated in a way so as to take

account of such objections would not satisfy

the requirement that any term to be implied

must be capable of clear expression; (v) that

a customer would not find obvious a term

that had the effect of absolving a bank where

suspicion was not in fact entertained; (vi) that

banks in practice use express terms to cater for

such circumstances. Te learned judge in his

judgment does not specifically address or rejectthose contentions, some of which have more

than just superficial attraction. It would be no

surprise if the Court of Appeal were invited to

consider the issue further at some point.

WIDER CONSIDERATIONS

Te workable balance identified by Lord

Justice Longmore in K Ltd v National

Westminster Bankrelied upon by Supperstone

J has not been universally endorsed. In

UMBS Online v SOCA [2008] 1 All ER

465Lords Justices Ward and Sedley weresharply critical of the effect of the consent

regime and the apparent lack of private law

redress for those who suffered harm as a

result of the legislation (Sedley LJ describing

the creation of SOCA as a sort of Alsatia a

region of executive action free from judicial

oversight). Te same year (2008), in similar

vein, the Law Society of England and Wales,

in a response to a Home Office consultation

on the consent regime and its effectiveness

(that endorsed similar representations by the

City of London Law Society), stated that:

[t]he continuing practical problems withthe consent regime [ ...] are inherent in the

legislative provisions that create the regime.

Insofar as the consent regime has been made

to work, it does so at very considerable and

disproportionate cost in time and money,

particularly cost to the private sector.

Further, the view that POCA represents a

conscious balancing of competing interests by

Parliament may be treated with some caution.

Te money laundering provisions under

Pt 7 of POCA, although treated largely as

consolidating measures rather than new law,in fact went much further than the analogous

provisions under the Criminal Justice Act

1988 (CJA 1988) (as amended by the CJA

1993) and the Drug rafficking Act 1994. o

that extent they markedly shifted the balance

in the opposite direction to that identified by

both Longmore LJ and Supperstone J. Tere

are two main reasons for this which, in the

febrile atmosphere following 9/11 (to which, for

instance, POCA s 330 is directly attributable),

received insufficient consideration as to their

likely effects before being enacted.

Te relevant provisions under ss 327329

of POCA, though defined for the first time

under POCA as nominate money launderingoffences, were not new but rather a consolidation

of analagous provisions under the CJA 1988 and

DA 1994. Te key difference is that POCA

took the brakes off the former provisions.

Under both the CJA 1988 and DA 1994

money laundering offences only concerned

property derived from conduct that was

suspected of disclosing an offence which was (in

effect) triable upon indictment, that is to say, a

serious offence. Secondly, for those engaged in

relevant financial business (later to become

broadened under the regulated sector underPOCA) the extra-territorial reach of the money

laundering provisions was, unlike POCA

s 340(2)(b), qualified by Reg 2(4) of the Money

Laundering Regulations 1993. While the CJA

1988, like POCA, provided a test of criminality

solely by reference to the criminal law of the UK,

for those subject to the 1993 ML Regulations

the reporting obligation was engaged only

in relation to conduct that would be both an

offence in English law and also an offence under

the law of the place where it in fact occurred (that

is, the Regulations provided for a requirement

for double criminality). POCA removedboth those qualifications by: (i) making any

criminal conduct sufficient to support a money

laundering offence (thereby differing from both

the Financial Action ask Force recommended

International Standards and from the

requirements of the EU AML directives); and

(ii) making the underlying conduct referable

solely to the criminal law of the UK. For

example, a company engaged in manufacturing

in Uzbekistan that pollutes a watercourse is to

be treated as though that were a (strict liability)

offence under the law of the UK (qvWaterResources Act 1991 s 584) and products

derived from such processes accordingly (viz as

criminal property). Tat the effects of these

changes were unforeseen by Parliament and

the draftsman is demonstrated by the fact

that, for example, POCA s 330 had to be

comprehensively redrafted as a result of the

tidal wave of largely useless SARs generated

as a result.

Further, it is elementary that one means

of assessing the effectiveness of a policy to

which legislation is intended to give effect (and

thus whether a reasonable balance between

competing interests has been struck) is by

measurement against stated policy objectives.In 2011 the Home Secretary stated that the

estimated cost of organised crime to the UK

was in the order of 40bn per annum. Te

purpose of the consent regime is to enable law

enforcement a window of opportunity in which

to interdict money laundering transactions.

(Tere is a wholly separate reporting regime

provided under POCA s 330, the purpose of

which is the accumulation of information and

data unrelated to any particular transaction.) In

20102011 247,601 SARs were made to SOCA.

Of those reports 13,662 were consent SARs,that is to say reports that concerned suspected

transactions suspended pending consent being

received from SOCA. (About half of all consent

SARs were made by banks and just under a

quarter by solicitors.) Interventions from refused

consents generated 30,529,138 recovered by

law enforcement agencies. Interventions in

respect of granted consent requests resulted in

recovery of a further 5,171,470. Against such

seemingly modest recoveries no doubt a great

deal of information is generated and made

available to the state but the ultimate value

and utility of such information for criminalintelligence necessarily remains unknown. But

it is clearly not necessaryto suspend a transaction

for information, as such, to be generated. Te

suspensive effect of a consent SAR is arguably

only of real utility if it results in intervention by

law enforcement agencies. It might be thought

that the modest recoveries attributable to

consent SARs require to be further justified

by reference to stated policy objectives. In

any event, whether the information gathered

by the state through consent SARs justifies

the interference with (innocent/untainted)transactions and the associated cost of this

and is an appropriate balancing of interests

remains a debate that is yet to be had. n

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Shah v HSBC Private Bank UK Limited Filling the Legislative Gaps 2-8-12