Business

Money laundering suspicions and disgruntled clients

Legal Notes

With Gina Phillipps Black

Wednesday, December 21, 2011    

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IF the recent UK Court of Appeal decision in Shah and another versus HSBC Private UK Limited is allowed to stand, banks may find themselves having to compensate customers whose transactions are delayed by anti-money-laundering procedures wrongly applied.

The case highlights difficulties faced by financial institutions in complying with their reporting obligations. The case should be of interest and concern to financial institutions and others who are subject to reporting obligations in Jamaica under the Proceeds of Crime Act (POCA). The case illustrates the importance of reporting entities having appropriate systems in place to ensure that the suspicions which lead to the making of a report are adequately documented. Some of the likely consequences of the decision are discussed here but only over time will we know the full extent of its repercussions. Entities in Jamaica who are under similar reporting obligations under money laundering legislation should pay close attention.

The case arose out of an instruction by Mr Shah and his wife to his bankers, HSBC, to wire funds. The bank asserted that it suspected that the money was criminal property and the transaction therefore constituted money-laundering for the purposes of the UK Proceeds of Crime Act 2002. The provisions of the UK Act are materially the same as those of the Jamaican Proceeds of Crime Act 2007. Consequently, the Bank delayed the transfer while it made an authorised disclosure to the Serious Organised Crime Agency (the equivalent of our Financial Investigations Division). The effect of the making of the authorised disclosure was that the bank was not legally permitted to carry out the transfers that were the subject of the disclosure until it obtained the appropriate consent to proceed.

The transaction was eventually completed by the bank. Mr Shah and his wife claimed that the failure to comply with his instructions and other breaches of duty resulted in their assets being seized and a loss of over US$330 million.

HSBC did not, and in fact could not, explain its investigations to Mr Shah, because where an authorised disclosure has been made it is an offence to make a disclosure that may 'tip off' or be likely to prejudice a money laundering investigation. In its defence, HSBC claimed that it was complying with money laundering legislation and denied Mr Shah's claim that its suspicions were irrational, negligently self-induced and mistaken.

During the hearing, HSBC disclosed documents related to its suspicions, but obscured the names of all the individuals reporting or considering the suspicion, except that of its nominated money laundering reporting officer. The first instance judge ruled that the names of the individuals were relevant and should be disclosed but permitted limited anonymity (by function) on the grounds of public interest immunity. The Court of Appeal however held that the identity of the individuals was not required to be disclosed, because it was not information that supported the Shahs' case or adversely affected HSBC's case. The redactions were therefore permitted. The court concluded that, absent a firm suggestion of bad faith by the Shahs, HSBC was entitled to withhold the identity of the staff concerned as being irrelevant to the matter under dispute. For that reason, the bank did not have to rely on the doctrine of public interest immunity.

While the decision may be of some comfort to reporting entities who may be concerned that they risk being identified in proceedings when they report their suspicions, it may be only cold comfort as the documents on which Shah could challenge the deletion were limited. The case turned heavily on the facts and in other cases therefore, the issues of public interest immunity issues may still have to be relied on the permit redaction of names. Of course, it remains possible that in another case, on a different set of facts, disclosure of the identity of staff members might be relevant. This judgment does not provide any blanket protection for banks. The confidentiality of a suspicious activity report and the identity of its makers has long been a genuine concern of those in reporting institutions as it relates to concerns about staff safety and the effect this may have on the effectiveness of the money laundering reporting regime.

The Court of Appeal admitted that banks are in a challenging and "unenviable" position, being at risk of prosecution for failing to report suspicions or proceeding without consent and at the same time at risk of being sued by customers for failing to carry out their instructions. The Court was however of the view that normal court procedures were "not to be side-stepped merely because Parliament has enacted stringent measures to inhibit the notorious evil of money laundering...". This shows the Courts approach in protecting customers by refusing to summarily dismiss "proper litigation" without any appropriate inquiry of any kind and requiring banks and other reporting entities to prove suspicion. The Court was equally clear that banks cannot be given carte blanche to rely on POCA disclosures as a means of avoiding any judicial scrutiny.

The decision also appears to open the gate for an investigation of suspicion in an attempt to establish that proper grounds for it existed at the relevant time. Properly documenting an 'audit trail' that effectively reflects the grounds of the suspicion leads to the making of the report may prove to be of valuable assistance in establishing that the suspicion was not only genuine, but reasonable in the circumstances. This should reduce or eliminate the risk of staff other than the Nominated Officer, being called to give evidence to prove the existence of the suspicion. In proper cases this could be an critical success element for a bank in its defence against a claim by a customer that its payment instructions are not complied with due to money laundering suspicions.

Reporting entities must continue to ensure that all suspicious activity reports are made promptly so as to avoid liability for the consequences of any delays. The case signals a good a time as any for reporting entities to review and where necessary revise their compliance processes and manuals to adequately address the issues raised by this interesting case. We will wait to see what impact, if any, the decision in Shah will have on the frequency and nature of suspsiciious activity reporting and on our local anti-money laundering landscape.

Gina Phillipps Black is a Partner at Myers, Fletcher & Gordon and a member of its Commercial Department. She heads of the Compliance sub-department may be contacted via gina.black @mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.

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