HSBC victory in Shah claim a relief to bank money-laundering monitors

By Guest Contributor
May 17, 2012

By Martin Coyle

LONDON/NEW YORK, May 17 (Thomson Reuters Accelus) – Counter-money laundering officials have welcomed a London High Court decision that saw wealthy Zimbabwean businessman Jayesh Shah fail in his $300 million claim against HSBC Private Bank. Yesterday’s judgment is a relief to financial businesses  who feared the impact of a Shah victory on overhauling their processes for suspicious activity reporting.

The case focused on HSBC’s decision to block four transactions totalling more than $38 million between September 2006 and February 2007. The bank suspected Shah of money laundering and sought consent from the Serious Organised Crime Agency (SOCA), the UK’s financial intelligence unit, to proceed with the transfers. Shah claimed that the delay in carrying out his requests in part led to the Reserve Bank of Zimbabwe freezing his investments in Zimbabwe and caused him significant losses. SOCA later gave consent to the transactions as legitimate. Shah had ‘parked’ the majority of the money in his HSBC account following an attempted fraud on his Credit Agricole account in July 2006. Shah’s claim was originally thrown out in January 2009, but a subsequent appeal allowed him to continue. This claim has now failed. In his judgment, Justice Michael Supperstone said that Shah “was able to, but did not, take reasonable steps to mitigate or avoid his loss”.

The decision marks the end of a 4 ½ year legal battle. An interim order was made at the High Court yesterday requiring Shah to pay 40 percent of HSBC’s legal costs, which are estimated to be around £2 million. It is thought that Shah’s costs are in the region of £1.2 million.

The decision also marks a bright spot for HSBC, which has been under regulatory fire for years in the United States for suspected failures anti- money-laundering processes.

A BURDENSOME SCENARIO

The Shah battle raised the burdensome scenario of banks having to justify every suspicious activity report (SAR) that they filed. The banking industry files the vast majority of the 250,000 or so SARs that reach SOCA each year.  Under UK law bank employees risk committing criminal offences if they fail to report money-laundering suspicions. Shah claimed that the bank had acted irrationally and had been mistaken in blocking his money. The bank denied this.

The bank was always confident that it would succeed, and the financial sector will be relieved, said Daren Allen, a partner at Berwin Leighton Paisner who represented HSBC during the case.

“I question whether financial services firms should ever be placed in this position where they are subject to an action like this in circumstances where all they were doing was complying with their statutory obligations. They have no option but to make suspicious activity reports if they have a suspicion of money laundering,” Allen told Thomson Reuters.

Allen declined to rule out similar challenges to bank practices in the future. “This case does not close off that avenue but I think it does indicate that banks which make suspicious activity reports in these circumstances are likely to be successful,” he said.

A win for Shah would have sparked a wholesale review of the way banks handle and report their internal suspicions of money laundering. One experienced former money-laundering reporting officer at a global investment bank, who spoke on condition of anonymity, said that the decision favoured the industry. “If one had to start justifying their decisions in the courts it would raise the bar for firms. This confirms the current state of play. The test for banks is a very low one and the balance remains in favour for them,” he told Thomson Reuters.

If the decision had gone the other way it would have reduced dramatically the number of SARs going to the authorities, the source said. “At the moment submitting a SAR is a cost-free option. You don’t lose anything. If you had to weigh up the financial costs of getting it wrong it would have a deterrent effect. You might have lawyers crawling all over them,” he said.  He added that if the judgment had gone the other way it could have led to a change in legislation.

HIGH HURDLES

The decision was likely to have little impact on the day-to-day role of money-laundering reporting officers, or MLROs, said lawyer Jonathan Fisher at Devereux Chambers.

“This case should be regarded as having been decided on its facts, and MLROs should proceed as before, taking care to address the issue of whether or not there are reasonable grounds for suspicion in a straightforward way,” he said.

Nevertheless, he said, the case kept the money-laundering process under a microscope. “The HSBC MLRO (Michael Wigley) was grilled for a number of days and his actions are now enshrined in a court judgment. MLROs have got to keep on their toes. HSBC didn’t cover itself in glory but it will be pleased and relieved at the decision,” Fisher said.

Duncan Aldred, a partner at CMS Cameron McKenna in London, said that a Shah victory would have been “disastrous” and that the decision provided some reassurance for banks. “What’s helpful about this case is that it will be a case that is pointed to to illustrate what people have always thought is the common sense position anyway,” he added.

Banks might want to think about rewriting some of their terms and conditions to strengthen their positions, said  Zia Ullah, a partner at law firm Pannone. “I also think we will see banks scrambling to ensure that the nominated officer role is properly authorised and documented,” he said.

SPOTLIGHT ON HSBC MONITORING

During the High Court hearing, which began in December 2011 and ended in March, the spotlight was shone on HSBC’s internal processes, which were described by Shah’s legal team as “chaotic” and “under-resourced.” The judge made no criticism of the bank’s processes in his judgment, however.

The case revealed the difficulties that hard-pressed reporting officers face in coping with the huge volume of internal reports filed by bank employees. Michael Wigley, the bank’s money laundering reporting manager, spent a gruelling six days giving evidence on the critical SARs he filed against Shah. In court, Wigley admitted that the bank had breached the counter-money laundering regulations as a result of its handling of internal suspicious transaction reports.

The regulatory breach resulted from a mishandling of the tens of thousands of SARs the bank received in 2006. The court heard that “large numbers” of internal suspicious transaction reports (STRs) were dealt with by an assistant and were not seen by Wigley, who should have under regulations in effect at the time.  An HSBC spokesman declined to comment on this, other than to say that the bank was pleased with the decision.

In contrast, HSBC’s U.S. unit confronts multiple investigations into its internal policing abilities. Authorities are scrutinizing client activities such as cross-border movements of bulk cash, and transactions linked to Iran and other parties under U.S. economic sanctions, the bank said in a February regulatory filing.

Confidential documents reviewed by Reuters that originate from investigations by two U.S. Attorneys’ offices allege that from 2005, the bank violated anti-money laundering laws on a massive scale by failing to adequately review hundreds of billions of dollars in transactions for any that might have links to drug trafficking, terrorist financing and other criminal activity.  Those allegations could not be confirmed. It is possible that subsequent inquiries have led investigators to alter their views of what went on inside HSBC’s compliance operation.

HSBC says it is cooperating with the investigations, and that it had “vastly” increased spending on its U.S. anti-money laundering systems.

In his Shah case ruling, the judge said that despite some “discrepancies” in the detail of Wigley’s evidence the official “genuinely” suspected that Shah’s funds were criminal property when he made his reports to SOCA.  The judge rejected claims that “someone else” in the bank had made the decision to stop the payments before Wigley.

The case saw some confusion about the appointment of Wigley as HSBC’s nominated officer for AML purposes. The judge said that although he would have expected HSBC to document properly the appointment of Wigley he was under no doubt that Wigley was nominated for that role.

“JAMES BOND” INVESTIGATION

Speaking to Shah on the sidelines of the case it was evident that he was frustrated at the way HSBC had handled his accounts. In court he accused the bank of conducting a “James Bond”-style investigation into his affairs.

Shah’s legal team at Edwards Wildman declined to comment when contacted by Thomson Reuters; Shah did not respond to a request for comment. The British Bankers’ Association also declined to comment on the judgment. The FSA declined to comment when asked whether it would be investigating HSBC’s alleged breach of the money laundering regulations 2003.

 

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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