Yesterday the Queen's Bench Division dismissed Mr Shah's claims for damages against HSBC Private Bank (UK) Ltd (HSBC) for over US$300m. Mr Shah's claim for breach of contract was on the basis that he had suffered loss because of the bank's failure to carry out his payment instructions promptly and their refusal to explain the basis for their failing to do so.
In September 2006, HSBC made a suspicious activity report (SAR) about Mr Shah when he attempted to return over US$28m to an account of his in Switzerland. A further four SARs were made over the next five months, with transactions being delayed while HSBC awaited consent to proceed from the Serious Organised Crime Agency (SOCA). HSBC told Mr Shah that it was complying with its statutory obligations but did not provide any further information to Mr Shah or his solicitors. During this time, a former employee alerted the Zimbabwean authorities to the fact that Mr Shah's UK accounts had been frozen. The Zimbabwean authorities subsequently froze and then seized Mr Shah's investments in Zimbabwe, resulting in alleged losses of over US$300m.
In dismissing Mr Shah's claims for damages against the bank, the court:
- confirmed the test for suspicion set out in the case of R v Da Silva  1 WLR 303;
- found after hearing evidence from the person who made the report that a claim of bad faith could not be sustained as the suspicion was honestly and genuinely held, in this case;
- found that the loss was caused primarily because of actions by the Zimbabwean authorities which HSBC could not have foreseen;
- found that Mr Shah had failed to mitigate his own losses by not using other sources of funds to pay the former employee;
- agreed to imply two terms into the bank's contract with Mr Shah to the effect that they could refuse to execute instructions in the absence of appropriate consent where it suspected that a transaction constituted money laundering, and that the bank would not provide information to the client if there was a risk of tipping off; and
- if a bank wants to rely on liability limitation clauses in its terms and conditions, it will need to show that those terms are reasonable in all the circumstances.
Two further interesting aspects of the case related to whether a suspicion had to be 'settled in nature' and whether the person who made the report was in fact the nominated officer.
In the case of Da Silva, the court had said a suspicion does not have to be clear or firmly grounded, but there might be a case where there should be a direction to a jury that the suspicion should be of a settled nature. Mr Shah had argued that because Mr Wigley, who made the report did not make extensive enquiries himself, his suspicion could not be genuinely held or settled in nature. The court quite rightly held that this was not an issue for this case.
The passage in Da Silva referred to a situation where the low threshold of suspicion had been met, further enquiries had removed the suspicion, no report was made, and a prosecution for money laundering or a failure to report was subsequently brought. The court in both Da Silva and in this judgement have confirmed that it is entirely appropriate for a money laundering reporting officer (MLRO) to bring fresh eyes to the concerns raised by a fee earner or employee, to ask questions and review information held on the client, before forming their own view on whether they have a suspicion. However once a suspicion is held by the MLRO, the obligation to report arises and there is no obligation to undertake extensive investigations for that suspicion to be formed or tested.
Who is the MLRO?
In this case HSBC had nominated another person, Mr Brownlee, as the MLRO. Mr Bownlee had delegated to Mr Wigley the role of receiving internal reports and making reports to SOCA for all of the UK operations. Mr Wigley was clearly treated by employees as the person to whom they reported and he clearly accepted that this was his role. He exercised his responsibilities within that role independently. The court found that Mr Wigley, for the purposes of the Proceeds of Crime Actwas actually the nominated officer and the person obliged to make the reports to SOCA.
In practice there are few points which firms should take away from the latest decision in Shah:
- While the court will imply terms into contracts regarding compliance with legal requirements, it is always preferable to specifically include such terms with your client care letters. The Law Society has suggested draft terms in its practice note on client care letters.
- It is good practice to formally appoint your MLRO and document their responsibilities and specifically document the responsibilities of any deputy or other person involved in making reports to SOCA.
- It is good practice for the MLRO to independently consider the facts of a transaction, review information held by the firm on the client and consider whether there are simple questions which could be asked to resolve issues raised by fee earners.
- It is good practice for the MLRO to clearly document the basis for their suspicion and to put those factors into the suspicious activity report, to help defeat allegations of reporting in bad faith.
- While care must be taken not to commit an offence of tipping off, it is important to clearly understand the offence, namely that what is prohibited is disclosing that a SAR has been made and only when such a disclosure is likely to prejudice an investigation. What can be said to a client will clearly depend on the facts of each case, and there are specific exemptions for lawyers giving legal advice to a client to dissuade them from engaging in criminal conduct.