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All of These Things are Just Like the Others


To Get You Up to Speed

Compliance officers around the world have been bracing for the resolution of a UK civil case called Shah v HSBC Private Bank, which has been winding its way through the system for nearly five years. Shah claimed USD 300 million in damages from his bank, because of its anti-money laundering related delays in processing Shaw’s requested transfer of US 7,282.50 to a creditor in Zimbabwe. HSBC had deemed that transfer, and earlier multimillion dollar transfers involving Shah’s Swiss accounts, to be suspicious. In accordance with UK law, HSBC reported the transactions to the country’s financial intelligence unit (FIU) and delayed their processing until permission was granted by the FIU to proceed. According to Shah, the effects of the unwarranted and unexplained delay cascaded from the creditor in Zimbabwe who reported the payment delay and money laundering suspicion to local police, to subsequent law enforcement investigations, to banking restrictions in Zimbabwe, and to the seizure of his assets there. The alleged loss of USD 300 million claimed by Shah relates principally to the banking restrictions in Zimbabwe. Had it not been for the unexplained and unwarranted delay, he would have been permitted to invest in open market debt instruments bearing annual interest rates between 450% and 550%, rather than only government debt instruments bearing annual interest rates of just 350%, according to Shah. Ultimately, the court decided that Shah was not entitled to the losses claimed, because (a) the relevant individual at HSBC had formed reasonable grounds for his suspicion of money laundering, (b) the transaction delay did not cause the loss, (c) the loss was not foreseeable (i.e. banking restrictions in Zimbabwe was not foreseeable based on the delay of a transaction with a value of USD 7,282.50, and (d) HSBC’s lack of detailed explanation to Shah and bankers about the reasons for the transaction delay was justified and did not cause the loss in any event. The decision did not discount the possibility that there are situations where a negligent suspicious transaction report or transaction delay could cause a foreseeable loss for which a bank could be liable.

Comparing Legislation in Canada to That In the UK

While Canadian law does not (yet) require regulated entities to seek permission to process transactions they deem suspicious, its threshold for deeming a transaction suspicious and reportable is comparable to that in the UK. The concepts of “suspicion” and “reasonable grounds to suspect” (the language used in both UK and Canadian law) were canvassed in the Shah decision, with references to earlier UK cases, including R v Da Silva (a criminal case) and K Limited v National Westminster Bank PLC (a civil case dealing with similar issues to Shah). Those two cases together led to three critical conclusions: that a suspicion is “...a possibility, which is more than fanciful, that the relevant facts exist... a vague feeling of unease would not suffice”, that suspicion is a subjective concept (to be assessed from the perspective of the person deciding or not deciding to the file the report), and that liability may exist if the basis for reporting if it was negligent or in bad faith. In forming their suspicion, HSBC relied on previous suspicious transaction reports, the size of earlier transactions, the source of funds, and the involvement of high risk countries. Notably, the decision discounted the possibility that Shah was ever involved in money laundering, while finding HSBC had itself formed reasonable grounds for its suspicion.

New Draft Guidelines from the OSFI

Based on the Office of the Superintendent of Financial Institutions’ (OSFI) new Draft Guideline B-20: Residential Mortgage Underwriting Practices and Procedures, the delay (and even denial) of transactions deemed suspicious, seen in UK legislation, may be coming to Canada. That draft guideline states that regulated entities “...should be satisfied there are no reasonable grounds to suspect the residential mortgage loan transaction is being used for illicit purposes”, and if there are such grounds, the regulated entity “...should decline to make the loan and consider filing a suspicious transaction report”. OSFI has suggested in other communication that regulated entities divest of clients that pose elevated risk, but not so explicitly suggested the denial of transactions. Importantly, the standard this guidance proposes calls for active consideration of suspicion for every transaction, rather than transaction monitoring and active (and presumably) consideration of suspicion for higher risk clients and transactions flagged by monitoring systems. Considering their earlier focus on mortgages in anti-money laundering guidance, this expectation may continue to be product specific.

What is a Chief Anti-Money Laundering Officer to do now?
  1. Consider the financial and reputation risk of claims for negligent and bad faith suspicious transaction reporting in your enterprise risk management program.
  2. Consider whether your anti-money laundering policies and procedures adequately explain the concept and standard of “reasonable grounds to suspect”, and involve adequate documentation requirements to record the subjective basis for assessments.
  3. 3. Consider whether the denial or delay of transaction should be integrated into your anti-money laundering risk mitigation plans, particularly for mortgage products.r