Banks' obligations to customers are subject to money laundering reporting requirements


Case facts

The claimants in the case, Mr & Mrs Shah, deposited US$28,000,000 with HSBC Private Bank (UK) Limited (the Bank). The Bank delayed in making several transfers requested by Mr Shah using the deposited funds. The Bank refused to explain the reason for the delay in making the payments, stating only that it was due to the bank complying with its statutory obligations.

The reason for the delay was that the Bank was suspicious that the deposit represented criminal property under the Proceeds of Crime Act 2002 (the Act) and had reported those suspicions in a suspicious activity report (SAR) to the UK's Serious Organised Crime Agency (SOCA). The Act prohibits banks from dealing with funds that they suspect to be criminal property unless they have disclosed that suspicion to SOCA and the relevant investigating agency has either consented to the transaction proceeding or failed to respond in the manner specified in the Act. In this case consent to each of the requested transfers was given.

The Bank's terms and conditions did not allow it to delay payments in order to comply with the requirements of the Act. The Bank accepted that, unless such a term was implied, failure to comply with the payment instructions would be a breach of contract.

The Act also prohibits an institution that has made an SAR from disclosing any information to a customer that might prejudice an official investigation. This is why the Bank only stated that it was complying with its statutory obligations when Mr Shah asked for an explanation for the delay.

Mr Shah was a resident of Zimbabwe, where he held substantial investments. One of the proposed recipients of a delayed payment complained to Zimbabwe's central bank that he had not been paid. The complaint suggested that the non-payment was a result of Mr Shah being investigated for money laundering in the UK. The central bank began making enquiries based on the money laundering allegation and subsequently seized Mr Shah's investments, converted Zimbabwean government securities that Mr Shah held into lower-yielding securities and terminated a loan agreement between Mr Shah and the central bank. The claimants argued that the Bank was liable for losses caused by the central bank's actions.

The court's decision

The court found that there was an implied term in the contract between the Bank and the claimants allowing the bank to refuse to process transactions while awaiting consent under the Act. The Bank was not in breach of contract for refusing to process the payment. The court also found that the Bank was not obliged to disclose information about SARs to its customers, and that it was in any event obliged to withhold the information sought by the claimants under the provisions of the Act.

The court found that the Bank's actions were not responsible for the claimants' losses, since the Zimbabwean central bank's actions were motivated by matters other than the payment delays. Even if the losses were attributable to the Bank's actions, they were not foreseeable. The court also found that, even if the bank had been liable, the claimants had not done anything to mitigate their loss even though the payment that prompted the complaint to the central bank was small and could have been easily funded from other sources.


Although this decision is a good one for banks, the decision may have been more straightforward if different internal procedures had been followed.

Rather than relying on an implied term, a bank's terms and conditions should allow the bank to do anything necessary to comply with its obligations under the Act. Banks should avoid any confusion as to which standard terms and conditions apply to a particular account, which occurred in this case but was resolved in favour of the Bank.

In this case, the person that decided to make the SAR did not have formal responsibility for overseeing HSBC Private Bank (UK) Limited's compliance with the Act. He did have formal responsibility for other entities in the HSBC group. This enabled the claimants to challenge whether HSBC Private Bank (UK) Limited had the suspicion of money laundering that would have required an SAR to be made under the Act. The court found that the person in question was the "de facto" reporting officer for HSBC Private Bank (UK) Limited, so the claimants' argument failed. In order to avoid disputes over the issue, banks should ensure that the person appointed to ensure compliance with the Act is formally appointed as the nominated reporting officer for all relevant group companies.

The HSBC group employee responsible for making the SAR did not maintain any formal contemporaneous record of his decision making process. The court was satisfied with his reliability as a witness and believed that the factors cited in court were those that led to his suspicions regarding the deposit. However, any scope for challenging the basis of his suspicions would have been avoided by maintaining appropriate contemporaneous records.

Further reading

A copy of the decision can be found here.