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The 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 to the UK Serious Organised Crime Agency (SOCA). The 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. The 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 the Proceeds of Crime Act 2002 (POCA). In that respect, the bank contended, it was merely complying with the anti-money laundering legislation. The 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 Shah’s 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 bank’s money laundering reporting officer was cross-examined over a period of six days in establishing this.) That hundreds of thousands of 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 the relevant conduct occurred in the UK. Technical (including regulatory) and strict liability offences are, surprisingly perhaps, sufficient to
give rise to money laundering offences. There is no requirement for criminal intent. All that is necessary is that the state of mind necessary to constitute suspicion should have existed at the relevant time in point of fact. There is no requirement that suspicion be reasonable.
The key to the consent regime is that each of the three substantive money laundering offences (ss 327–329) 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 before proceeding with the transaction (the "prohibited act") consent is given by SOCA to do so. There are two periods in which a transaction may be effectively sterilised 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. That period runs from the date on which consent is declined by SOCA. In the absence of a court (restraint) order, after the expiry of that further period consent to the transaction is deemed to be given. (In the overwhelming
KEY POINTSIn 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 is reported but turns out to be unfounded. The 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 its customer’s 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. That 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.
Author Paul 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.
The 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.
The point is that it is an offence to proceed with a transaction suspected of involving property representing a benefit from criminal conduct but only where the property is not only suspected of representing a benefit from criminal conduct, but also does in fact represent 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 the terms of POCA, to proceed with a transaction. The 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 legislation where a transaction is incorrectly/unjustifiably suspected of involving property derived from criminal conduct. The simple rationale for this position is that money laundering can only involve criminal property.
The 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 previously thought 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 complete absence 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?The 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. The judge referred to the principles for implying a contractual term identified in Attorney-General of Belize v Belize Telecom [2009] 1 WLR 1988. The 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. The 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 restriction on or qualification of the bank’s duties rather than on grounds of illegality, but the end result is the same.” The 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 this term 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 Longmore’s 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 his view limited.)
With respect, Supperstone J’s 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 late amendment 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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Biog boxPaul Marshall is a barrister at 4-5 Gray’s Inn Square, London, practising in commercial and regulatory law and civil fraud. Email: [email protected]
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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. The learned judge in his judgment does not specifically address or reject those 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 CONSIDERATIONSThe “workable balance” identified by Lord Justice Longmore in K Ltd v National Westminster Bank relied upon by Supperstone J has not been universally endorsed. In UMBS Online v SOCA [2008] 1 All ER 465 Lords Justices Ward and Sedley were sharply 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). The 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 with the 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. The 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 Trafficking Act 1994. To that extent they markedly shifted the balance in the opposite direction to that identified by both Longmore LJ and Supperstone J. There 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.
The relevant provisions under ss 327–329 of POCA, though defined for the first time under POCA as nominate money laundering offences, were not new but rather a consolidation of analagous provisions under the CJA 1988 and DTA 1994. The key difference is that POCA took the brakes off the former provisions. Under both the CJA 1988 and DTA 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” under POCA) 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 removed both those qualifications by: (i) making any criminal conduct sufficient to support a money laundering offence (thereby differing from both the Financial Action Task 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 (qv Water Resources Act 1991 s 584) and products derived from such processes accordingly (viz as criminal property). That 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. The purpose of the “consent regime” is to enable law enforcement a window of opportunity in which to interdict money laundering transactions. (There 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 2010–2011 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 criminal intelligence necessarily remains unknown. But it is clearly not necessary to suspend a transaction for information, as such, to be generated. The 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
