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Hong Kong – Banks’ Position In Relation With AML Statutory Provisions And How It Can Be Reconciled With Their Contractual Duties.

16 May, 2013

 

Legal News & Analysis – Asia Pacific – Hong Kong – Dispute Resolution

 

The Shah case

 

In the recent English case of Shah and Another v HSBC Private Bank (UK) Ltd[2013] 1 all ER ("the Shah case "), HSBC Private Bank, sued as the defendant, received instructions at various POINts of time to make Substantial Refers to the transactions that On the first OCCASION of INSTRUCTIONS to remit a nominated officer of the Bank Suspected the money was Criminal Property, and the Bank Made A suspicious activity report to the Serious Organised Crime Agency ( SOCA ), and ASKED for permission to perform the transaction and at the same time refused to disclose to the customer the reason for not carrying out the customer's instructions. This pattern repeated when further instructions of remittance were received, and only when SOCA gave the permission would HSBC make the remittance. As a result of the expected recipient of the fund not receiving the remittance, this person reported the matter to the Zimbabwean police, and the customer suffered very substantial losses when the police authority intervened. The customer hence sued HSBC.

 

Judge Supperstone (of the Court of First Instance) held that it was an implied term in the contract between the PARTIES that the defendant BanK was entitled to refuse to PROCESS instructions in the absence of CONSENT, under the Proceeds of Crime Act 2002 (" 2002 Act ") if it or its agent Suspected that the transactions constituted money laundering." The term was to be implied by reason of the STATUTORY provisions … It was plain that the Act had intervened in the contractual RELATIONSHIP between banker and Customer in a way which might the cause is the Customer prejudice , but it had been a PRICE Recognised that that was that Parliament had deemed worth paying in the fight against money laundering. "

 

Apparently, there is no recent legal decision in Hong Kong similar to the Shah case. The importance of the rationale in the Shah case is the "implied term" concept, which decides that the statutory provisions would have an overriding effect on contracts entered into between a bank and its customer.

 

Equivalent sections of Hong Kong Ordinances & HKMA Guideline

 

The new Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) came into operation on 1 April 2012, but the relevant statutory provisions / guidelines set out in it are not so much about "reporting" but about "conducting due Diligence" on The BanK's Customers, Monitoring BUSINESS relationships with Customers, having special Requirements for INSURANCE POLICIES Refers to the transactions that and wire Transfers. The Guideline on Anti-Money Laundering and Counter-Terrorist Financing (for AIs) was issued by the Monetary AUTHORITY in January 2012 ( the Guideline ) The Guideline provides financial institutions with Practice Guidance on Money Laundering and Terrorist Financing in relation to the AML legislation The relevant parts involving Suspicious Transaction Reports by financial INSTITUTIONS IS "Chapter 7" and the following Ordinances are referred to in that Chapter: –
 

 

  • Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405) ( dtrop");
  • Organized and Serious Crimes Ordinance (Cap. 455) (" OSCO "); and
  • United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575) ("UNATMO ").

 

The relevant sections of these Ordinances which have provisions similar or equivalent to the 2002 Act are summarised in the table below: –

 


Proceeds of Crime Act 2002 HK legislation

1

Disclosure of suspected transaction by a person to the "nominated officer"

s 330

Disclosure of suspected transaction by a person to the "authorized officer"

s 25A (1) & (4) dtrop 
s 25A (1) & (4) OSCO 
S.12 (1) & (4) UNATMO


2

Disclosure by the nominated person officer to SOCA

s 331

Disclosure by the authorized officer to relevant authorities, including JFIU

s. 25A (9) dtrop. 
s. 25A (9), 
(6) UNATMO


3

"Prejudicing an investigation" following disclosure

ss. 333 & 342

"Prejudicing an investigation following disclosure"

s the 25A (5) dtrop- 
s. 25A (5) OSCO 
S.12 (5) UNATMO


4

Consent from SOCA & the Nominated person Show to effect 
the Transactions

ss. 335 & 336

Consent from relevant authorities (such as JFIU) and the authorized officer

s 25A (2) dtrop- 
s. 25A (2) OSCO 
S.12 (2) UNATMO


 

Implied term of contract between a bank and its customer

 

As mentioned above, there is no recent Hong Kong legal decision shedding light on how to reconcile the statutory duties imposed by the various Ordinances and the bank's contractual duties and / or common law duty owed to its customer. The decision in the Shah case, introducing the "implied term" which allows the bank to refuse to execute instructions due to suspected money laundering, would be useful to the bank's operation and of practical assistance.

 

The Hong Kong STATUTORY provisions in the ABOVE mentioned Ordinances also provide that DISCLOSURE of Suspected money laundering shall not be TREATED as a Breach of any restriction upon THE DISCLOSURE of information imposed by contract or by any enactment, rule of Conduct or other provisions; and shall not render the person who Made THE DISCLOSURE liable for Damages . These are: –

 

  • s. 25A (3) DTROP
  • s 25A (3) OSCO
  • s.12 (3) UNATMO 

 

Although ss. 338 and 339 of the 2002 Act provide that an authorised disclosure is not to be taken to breach any restriction on the disclosure of information (however imposed), there is no specific exclusion of liability, as provided in the Hong Kong Ordinances.

 

Effect of the Hong Kong statutory provisions and the Shah Case

 

Hence, perhaps a Hong Kong banker would be able to rely on both the STATUTORY "Exclusion of Liability and damages for for disclosure of" Provisions, and also the rationale enunciated by Judge Supperstone in the Shah case and contend that it was an implied term in the contract between the parties that a Bank is entitled to refuse to PROCESS instructions in the absence of CONSENT from the relevant authority , the Rationale and effect of the UK legal decision being: –

 

  1. the reporting regime under the 2002 Act necessarily made inroads into the contractual duty of bankers to comply with a customer's payment instructions;
  2. it was plain that the 2002 Act had intervened in the contractual relationship between banker and customer in a way which might even cause the customer prejudice;
  3. that it had been recognised that that was a price that Parliament had deemed worth paying in the fight against money laundering; and
  4. the precise and workable balance of conflicting interests in the 2002 Act required the implication of the term in the contract between a banker and a customer.

 

Whether the Shah case will be subject to any appeal remains unknown.

 

 

For further information, please contact:

 

Daisy Tong, Partner, Deacons

daisy.tong@deacons.com.hk

 

Karen Dicks, Deacons

karen.dicks@deacons.com.hk
 

 

 

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