Collateral damage from money-laundering legislation
I have seen
this more than once: a client rings in a panic, having had his business bank
account frozen by the bank. His bank won’t tell him why. They are suddenly
completely uncooperative, and he is naturally livid. He wants to know how to
get the account unfrozen, and if necessary to take immediate legal action. What
should you do if it happens to you?
The reason
is almost always that the bank has formed a suspicion that the account or the
customer is involved in money-laundering (or terrorist financing). Once it
forms that suspicion, the bank is obliged by law to block transactions;
otherwise it risks committing an offence of converting or transferring criminal
property under the Proceeds
of Crime Act 2002 or facilitating the retention or control of terrorist
property under the Terrorism Act 2000.
It also has to make a report to the Serious Organised Crime Agency (SOCA) explaining
its suspicions.
You may be
an entirely innocent party. The suspicion could relate to an investor, employee,
customer or supplier. The concept of “proceeds of crime” is extremely wide, and
can include, for instance, the benefit of tax evasion, or business cost savings
arising from minor offences.
Suspicions
can be triggered by the bank’s internal systems, far away from your
relationship manager. All banks now operate back-office systems for flagging up
and reporting unusual transactions. Your manager might know why something has
happened, but it may still look suspicious to someone – or a computer – in head
office.
What is
more, the bank is prevented from telling you why it has done what it has done:
it is an offence
to “tip off” a person if that could prejudice an investigation following
the report. The only way to avoid lying to you is for the bank to say nothing
at all, so it just clams up. Of course this can be a nonsense: any criminal or
terrorist, and most well-informed people, will know that if a bank or
professional adviser suddenly refuses to act on instructions and won’t tell you
why, it is probably because they have a made a money-laundering report.
SOCA can
give consent to allow transactions to proceed, or if it doesn’t respond within
seven working days, the freeze ends. But if SOCA refuses consent, the freeze is
extended until 31 days from the
date of refusal of consent. In that case, SOCA will usually have notified the
police or other enforcement agencies. If they want further time to investigate,
they will have to make an application to court.
The courts
have consistently supported banks when they have relied on their duties under the
money-laundering legislation, even if the customer is entirely innocent.
So the customer usually has no remedy, even if his business is left in ruins. A
Mr Shah has
been claiming losses of $330 million from HSBC which he alleges flowed from
their blocking of transfers from his account.
To be
protected, the bank just has to satisfy the court that it had a suspicion. The
suspicion does not even have to be reasonable: if the bank has a suspicion, it
must report and it must stop the transaction. The court has said that the bank
must “think that there is a possibility, which is more than fanciful, that the
relevant facts exist. A vague feeling of unease would not suffice. But the
statute does not require the suspicion to be 'clear' or 'firmly grounded and
targeted on specific facts' or even based on 'reasonable grounds'."
Mr Shah
tried a variety of different attacks on the bank’s position. He said that the
bank’s suspicion was irrational; negligently self-induced; mistaken; and/or
automatically generated by computer. He said that the bank was negligent, or
breached its duty to give him relevant information about his affairs. The Court
of Appeal dismissed all these claims apart from the last. It allowed the claim
to go forward only in case Mr Shah could prove that the bank did not in fact
have a suspicion at all; or he could prove loss from the bank’s failure to tell
him what was going on, at a time when it was not protected by the “tipping off”
requirement – perhaps because the investigation had ended. In a second visit to
the Court of Appeal, the court even refused to order the bank to tell Mr Shah
which employees had the suspicions and made the reports, on grounds that it was
not relevant; public interest immunity could also apply.
Mr Shah’s lawyers made a third unsuccessful visit to the Court of Appeal
before the remains of his case came on for trial in December 2011. The trial is
still going on, with a decision not expected for several months, but the legal
principles are clear.
So what advice do I have for the innocent bank
customer, without the resources of Mr Shah, to fund costs? Each case depends on
its facts, but early litigation is not likely to be successful. In the short
term, the best answer is usually to work with the bank to allay the suspicion
and get the freezing lifted. If the client thinks he knows what has caused the
suspicion, give the bank the evidence. Ask them to seek the permission of SOCA to
proceed with the transaction, as a matter of urgency. Whilst pointing out the
possibility of a claim may focus their minds and make them review their decisions,
it is unlikely that there will be a successful claim if there is a genuine
suspicion. Bank customers should perhaps be alive to these issues beforehand
and try to head them off, for example by giving the bank an explanation in advance
of transactions that may look suspicious. As Mr Shah is finding out, the cards
are heavily stacked against the customer.
