ANTI-MONEY LAUNDERING ANNUAL CONFERENCE 2010

CIVIL LIABILITY

Nicola BoultonByrne and Partners LLP

London

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Solicitors’ civil liability in relation to money laundering

Claims by clients

Claims by third parties

ancillary to criminal proceedings (will not be discussed)

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Claims by Clients

Solicitor makes SAR to SOCA

Waiting period for SOCA’s consent

Solicitor can’t progress the transaction or deal with the monies

Solicitor in regulated sector can’t explain the reason for the delay to the client.

= very frustrated client

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Cases on injunctions

Squirrell Limited v Nat West

(by customer against bank)

K Limited v Nat West

(by customer against bank)

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Findings

private law obligations of banks to their customers are suspended during the period of waiting for SOCA consent.

courts refused to grant injunction requiring bank to comply with customer’s instructions during waiting period as would require bank to commit a criminal offence

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Suspicion

subjective fact

need not be reasonable, just genuine

“…he or she must think that there is a possibility, which is more than fanciful, that the relevant facts exist. This is subject, in an appropriate case, to the further requirement that the suspicion so formed should be of a settled nature” (Longmore LJ in K Limited v Nat West)

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Examination of evidence of suspicion-injunctions

K Limited v. Nat West

Bank’s external solicitor gave evidence of the suspicion held by the bank in order to avoid the bank committing a tipping off offence (as it was then an exception to tipping off if the disclosure was made by a professional legal adviser in connection with legal proceedings. (POCA s.333(2) and (3) (since replaced by s333A-E))

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Examination of evidence of suspicion - injunctions

cross-examination of bank’s solicitors would be pointless as only reporting suspicion of bank’s officers

No mechanism to require bank officer to attend for cross-examination and of limited use in any event:

“. ...Once the employee confirmed that he had a suspicion, any judge would be highly likely to find that he did indeed have that suspicion. Any cross-examination would be bound to decline into an argument whether what the employee thought could amount in law to a suspicion, which is not a proper matter for cross-examination”.

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Shah v HSBC – first claim for damages by customer

Mr Shah was a businessman with dealings in Zimbabwe

Shah asked HSBC to make 4 transactions over a period from September 2006 to February 2007. None of these were immediately executed by HSBC.

HSBC told Mr Shah they could not comply immediately because of "UK statutory obligations".

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Shah v HSBC – first claim for damages by customer (2)

HSBC made SARs to SOCA. Once consent was received, HSBC made the transactions (save one that was cancelled by Mr Shah)

One was payment to ex-employee, who Mr Shah believed told Zimbabwe police that Mr Shah was under investigation.

Mr Shah claimed that as a result Reserve Bank of Zimbabwe seized his assets and caused him to lose $331 million in interest.

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Shah’s claims - overview

That HSBC :- failed to carry out his instructions was negligent in relation to the disclosures to SOCA breached its duty of agency

Not a claim for injunction but damages made six months after the last transaction

In defence, HSBC asserted it suspected money

laundering and made disclosures to SOCA 

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First instance (before Hamlen J) HSBC applied for summary judgment on all

claims.

Witness statement from HSBC’s external solicitor confirmed that all suspicions reported to SOCA went through a money laundering reporting officer, and that at least 3 different individuals within HSBC held a suspicion in each of the 4 transactions

Summary judgment granted on all claims for

HSBC.  

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Failure to carry out instructions

Shah put the bank to proof on its suspicion

Shah also asserted the suspicion was irrational, negligently self-induced, mistaken and generated automatically by computer programme, so no human being held a suspicion.

Shah did not allege bad faith by HSBC.

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Court of Appeal (Longmore LJ giving

judgment) on failure to follow instructions suspicion did not have to be based on reasonable

grounds, so claim based on irrationality or negligently self-induced suspicion could not be allowed.

no evidence of mistake by HSBC or lack of human input into suspicion, so summary judgment on these claims upheld.

However, Mr Shah could still put the bank to proof on its suspicion, so the summary judgment was overturned on this ground.

“”…any claim by a customer that his bank has not executed his instructions is, on the face of it, a strong claim if the instructions have not, in fact, been executed. It will seldom, if ever, be contradicted by the documentary evidence on which it is founded. It is only when the bank says that it suspects the customer was money-laundering that any defence to a claim begins to emerge…”

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CA on evidence of suspicion

CA disagreed with HSBC’s argument (based on K Ltd v Nat West) that no evidence of suspicion could be given in the usual way

Rather unlike injunction cases within waiting period, “… there is no reason why the bank should not be required to prove the important face of suspicion in the ordinary way at trial by first making relevant disclosure and then calling primary or secondary evidence from relevant witnesses”.

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CA on evidence of suspicion (2)

CA noted that in non-injunction cases “by the time of any trial the dust will have settled and it is most unlikely that the tipping-off provision will continue to be relevant. It will also almost certainly be known whether any investigation is or might be taking place which any disclosure by admissible evidence in court proceedings would be likely to prejudice within section 333(1). “

CA did not agree that no court would order disclosure of relevant documents including those reporting the bank’s suspicions to SOCA. Rather, CA said that judge in chambers could make a decision if a bank wishes to conceal part or (less likely) all of a document.

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Claim for negligence regarding disclosures

Shah claimed for negligence based on:-

1) alleged delay in HSBC asking for consent

2) HSBC failed to ask for advance consent in respect of future transactions

3) HSBC should have made disclosure to SOCA when funds were first deposited

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Claim for negligence

- CA findings

CA held1) no grounds for claims of delays (2 day delay was acceptable)2) the authorities would not give consent in the abstract to future transactions before any payment instruction was given so it was not negligent to not ask for such consent3) banks would not normally have grounds for suspicion upon a deposit and in any case it would not make any difference to customer as bank would still have to get consent to execute a payment instruction when it customer gave it

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Breach of agency duty

Shah claimed HSBC was in breach of its duty to keep him (as principal) informed as to the state of his affairs.

HSBC had told him on 2 November 2006 that there had been investigations into his affairs but they were over.

HSBC refused to provide an explanation of investigations in March 2007 and in May 2007 refused to disclose details of its communications with SOCA.

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Breach of agency duty – CA findings

CA allowed breach of agency claim to go to trial.

CA noted that a Met police officer had made a witness statement in December 2006 regarding the investigation into Mr Shah’s account. CA concluded that by the date of witness statement, an investigation into Mr Shah’s account must have ceased since otherwise the police officer would be “tipping off”.

“This shows, to my mind, that there must (arguably) come a time when Mr Shah is entitled to have more information about the conduct of his affairs than he has yet been given. Whether he was so entitled on 2nd November 2006 must remain highly doubtful and whether any later disclosure could have avoided the losses which he is claiming must also be doubtful.”

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Preventing claims by client

Internal records of when suspicion arises

Engagement letter

Accurate and timely reporting to authorities consider reporting receipt of funds if suspicious

Effect client instructions promptly once consent from authorities received (subject to considerations of third party claims, discussed below!)

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Informing Client?

Fiduciary duties v tipping off

Consider informing client when there is no risk of tipping off or prejudicing investigation especially if asked

File correspondence with authorities separate from client file

Send client to litigation solicitor who can deduce SAR and explain it to client.

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General

don’t discuss suspicion unnecessarily with third parties or employees of client, agent, etc

avoid voluntary provision of information to SOCA/ police outside of SAR (ask for permission to ask client’s consent to provision of info – if not, require a production order)

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Claims by Third Parties

Suspicion of proceeds of crime may lead to liability to victims under accessory liability

Consent by SOCA to dealing with the suspected proceeds unlikely to help and is evidence of suspicion

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Dishonest assistance

Trust or fiduciary relationship

Breach of trust / fiduciary duties

Third party dishonestly induces or assists breach

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Knowing receipt

Assets held under a trust/fiduciary relationship

Transfer of assets in breach of trust/fiduciary duties

Third party beneficially receives assets

In circumstances where it would unconscionable for third party to retain assets

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Finers v Miro [1991] 1 W.L.R. 35 (CA)

English solicitors helped client set up complex structure of trusts but later suspected funds held were proceeds of insurance fraud in the US.

They applied to the English court for directions. Solicitors were trustees of express trust to which

defendant was beneficiary Court suggested it had jurisdiction to give directions to

constructive trustees as well Court directed that the US liquidator be given notice of

the proceedings and their subject matter Duty of confidentiality unraveled by fraud

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Bank of Scotland v A Limited and others;

Amalgamated Metal Trading Ltd v City of London Police and others

Claimants held money they suspected was the proceeds of crime

Applied to the court for relief

Conclusion – wait to be sued for money or apply for a final declaration that it is not proceeds of crime

Declaration only possible after full trial

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Options

wait to be sued

apply to the Court for directions or a final declaration

costs?

notify insurers