Frozen bank account and no explanation – an overview of suspicious Activity Reports and the high street bank customer from Brett Wilson LLP civil fraud solicitors.
suspicious Activity Reports (sARs) have been with us for over 10 years, but to many outside the Regulated sector they are a somewhat unfamiliar concept. The number of sARs has increased steadily. The latest available statistics (October 2009-september 2010) show that nearly 250,000 sARs are made each year. So what exactly is a sAR, what goes on behind the scenes, and what causes your bank account to be frozen? The following is a typical example. John earns £30,000 per year and has a bank account at one of the Big Four high street banks (over half of all sARs are reported by the Big Four, and 80% from all banks). John receives £100,000 in his account from, say, Nigeria. The Banks computer has an algorithm designed to spot any transaction that is unusual or suspicious. John typically deposits £2,000 per month. Nigeria is on a watch list. An alarm bell rings and the transaction is brought to the attention of the Banks Nominated Officer “lets call him Dave. Dave looks at the information and has concerns that the activity is suspicious. That is, he suspects money laundering. He files an electronic sAR with the serious Organised Crime Agency (sOCA) and includes a request for consent to proceed with the transaction. Dave presses a button on the Banks computer system; this freezes the bank account.
Pausing here, why has Dave done this? There are two reasons. Firstly, the Bank is in the Regulated sector and must have a Nominated Officer and such a system in place. Under sections 330-332 of the Proceeds of Crime Act 2002 (POCA) Dave as the Nominated Officer is obliged to report any suspicious activity to sOCA. If he does not he commits a criminal offence. Likewise, any other member of the Bank is obliged to report any suspicion they have to Dave (for Dave to decide whether to file a sAR). Thus, other members of the Bank can pass the buck to Dave for him to make the call, but if they dont pass it they themselves will commit an offence. Banks cannot choose to turn a blind eye. Like it or not, those in the Regulated sector are very much in the frontline of the policing of money laundering. They are the unpaid eyes and ears with everything to lose and nothing to gain. It sounds harsh because it is (on numerous occasions the Court of Appeal has reminded us that POCA is intended to be draconian piece of legislation). The second reason why Dave acts is because the filing of a sAR (if followed by consent to proceed) will provide a defence to any allegation of money laundering. Money laundering offences (sections 327-329 of POCA) prohibit the acquisition, possession, retention, concealment, disguise, conversion, use, transfer or removal [from the UK] of criminal property, where the defendant knows or suspects that the property represents the proceeds of crime or is intended for use in criminal activity. Being concerned in arrangements which the defendant knows or suspects will facilitate money laundering is also an offence. To put it crudely, if Dave suspects that the money in Johns account might be dirty then the Bank cannot allow John to move or access the money and he must file a report to sOCA.
Friday night comes round and John tries to pay a restaurant bill. His card doesnt work. This is terribly embarrassing; his partner has to pay for him. On saturday John telephones his bank to ask whats going on. His card is still not working, but he knows his account is not overdrawn (In fact hes just received a large inheritance from his late grandmothers estate in Nigeria). The Banks centralised call centre is less than helpful. They tell him to come into the branch. John does this on Monday. Again they cannot help; the manager is off sick apparently. John calls up the Bank the following day to complain. They tell him the account has been suspended, but they cannot say why. They suggest he pops into a branch. John is pulling his hair out. He goes into a branch and after being kept waiting for what seems to be an inordinate amount of time is told that they cannot give him any further information, but that he should receive a letter.
Why cant the Bank tell John about the sAR? The answer can be found at section 333 of POCA. It is a criminal offence to tip someone off about a sAR; that is to notify them that they know or believe that a sAR has been made when to do so is likely to prejudice any investigation. In Johns case “ if John was involved in an international fraud “ knowing that a sAR had been made could prompt him to notify co-conspirators and/or flee from the jurisdiction. This is unfortunate because if the money was legitimate (e.g. a bona fide inheritance from his late grandmother) he could explain this and seek to assuage any suspicion.
sOCA will review the sAR relating to John and cross-reference it with existing information. It may refer the information to a law enforcement agency or local police force to investigate. Alternatively, it might determine no further action is necessary. In the instant example, the Bank has to appease a customer who is becoming increasingly more upset as the days pass. If John isnt a criminal the Bank does not want to lose his custom. This is why the Bank requested consent to proceed when it filed the sAR. If sOCA does not respond to the Bank within seven working days then consent is deemed to have been provided. The Bank can lift the inhibition on Johns account and hope for forgiveness (although they may still be prevented from explaining why the account wasnt working). sOCA can provide consent within days and sometimes within hours. However, consent isnt always the end of the matter. Indeed, the latest statistics show that between October 2009 and september 2010 there were more cases which led to arrests when consent had been granted by sOCA as opposed to when consent had been refused (presumably because the inhibition itself could make those engaged in criminal activity suspicious that the authorities were on to them).
In Johns case, sOCA has responded to the Bank within seven working days refusing consent pro tem and indicating it needs more time. This means the Bank must keep the inhibition in place for a further 31 calendar days unless sOCA provides consent sooner. If the money from Nigeria is bona fide this is going to result in a very irate John. If consent is eventually provided then the inhibition will be lifted, but again the Bank may not offer an explanation if it feels this may prejudice an investigation (although see below for more). At the expiration of 31 days if nothing has happened then the Bank is able to lift the inhibitions. Can sOCA tell the bank it needs more time? No. The inhibition can only continue if a law enforcement agency has obtained a court order “ a freezing injunction, property freezing order or a restraint order “ over Johns assets. If this is the case, whilst the initial application is likely to be ex-parte/without notice to John, he will be served with a copy of the order and an accompanying affidavit. At this point, John will know the reason why he cannot access the money in his account. In this example, sOCA may have referred the matter to the City of London Police. They have investigated and believe the money is the proceeds of a fraud. They have sought a restraint order under POCA over his assets (in the event of a successful prosecution and conviction, they hope to recover this money in confiscation proceedings). The restraint order was granted ex-parte at southwark Crown Court. There is a distinct possibility that the application and Johns arrest will coincide so that he is not tipped off about the possibility of either action. In any event, the accompanying affidavit will explain the basis of the polices suspicion. John will be able to apply to the Crown Court to argue that the order should be discharged or varied.
Figures for October 2009-september 2010 show that sARs led to £29 million being restrained in such a fashion. A further £1.5 million was seized in cash following sARs. This is impressive, but what gets less press is the number of sARs that go nowhere because the suspicions prove to be unfounded. What about the inconvenience to those denied access to their funds? It is difficult not to have sympathy for Nominated Officers like Dave. If they do not make sARs when they should they are liable for prosecution. The natural result is that Nominated Officers are more likely to err on the side of caution and make more rather than less sARs. The effect of this is that less Nominated Officers get prosecuted, but that more bank customers get inconvenienced and potentially suffer financial loss as a result of being unable to access their funds.
The Court of Appeal decision in shah and another v HsBC Private Bank plc EWCA Civ 31 provides some help in this regard. In this case HsBC had filed two sARs which delayed two transactions. Mr shah had assets in Zimbabwe. The Zimbabwean authorities were concerned that Mr shah was under investigation (he wasnt) and seized his assets to the value of $331 million. Mr shah sued HsBC on the basis that it had acted irrationally, negligently (in inducing a suspicion) and in breach of its duty of care to act promptly and to keep him informed as agent. The starting point is that a bank acts as an agent for a customer and has a duty to account to its principal for money it holds (i.e. follow instructions) and to keep it informed. POCA can be said to trump this, but only where there is genuine suspicion of money laundering and only on a temporary basis. The Court ruled that the suspicion does not have to be on reasonable grounds, but must be more than fanciful. An unusual customer or a transaction that is fishy is not sufficient. significantly, the Court further held that a customer should be able to require the bank to prove that the suspicion held was a genuine one of money laundering. This would necessarily mean the bank divulging it had made a sAR, notes and memos etc which it might be reluctant to do for fear of committing the offence of tipping off. However, the Court said that the risks of tipping off or prejudicing an investigation once the moratorium had expired must diminish and the common law duty of an agent to account to their principal must regain prominence. The precise point at which the customer became entitled to know more information was not determined as the Court of Appeal was dealing with the decision of a summary judgment application and considered that such matters would needed to be explored at a trial. The Court further, and helpfully, stated that banks have a duty to file sARs promptly. The decision has potentially opened the door to individuals challenging sARs and seeking damages where they have been made over zealously However, given the low threshold required to establish suspicion it remains to be seen how many claims will be successful in practice.
shah might be a headache for those in the Regulated sector. It effectively puts Nominated Officers between a rock and a hard place: being prosecuted for not making a sAR or being sued for making a sAR too readily. However, for the inconvenienced bank customer it provides some ammunition against the existing draconian framework.
This article offers an overview of the topic and does not constitute legal advice.
Articles are intended as an introduction to the topic and do not constitute legal advice.