Frozen bank account and no explanation? Suspicious Activity Reports and the high street bank customer post April 2017
Suspicious Activity Reports (SARs) have been with us for over 15 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 2015 to March 2017) show that over 630,000 SARS have been made in an 18-month period. The National Crime Agency reported that 43,290 SARS were received in March 2017, the highest number ever recorded for one month. 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 Bank’s 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 – let’s 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 National Crime Agency (NCA) and includes a request for consent to proceed with the transaction. Dave presses a button on the Bank's 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 the NCA. 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 don’t 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 a 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 John's account might be dirty then the Bank cannot allow John to move or access the money and he must file a report to the NCA.
Friday night comes around and John tries to pay a restaurant bill. His card doesn’t work. This is terribly embarrassing; his partner has to pay for him. On Saturday John telephones his bank to ask what’s going on. His card is still not working, but he knows his account is not overdrawn - in fact he’s just received a large inheritance from his late grandmother’s estate in Nigeria. The Bank’s 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 shorly.
Why can’t 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 John’s 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.
The NCA 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 isn’t 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 the NCA 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 John’s account and hope for forgiveness (although they may still be prevented from explaining why the account wasn’t working). The NCA can provide consent within days and sometimes within hours but this is not always the case.
In John’s matter, the NCA 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 (known as the ‘moratorium period’) while the NCA decide what action to take, whether it be to restrain or seize the funds, or take no further action. During this period, Dave and other members of the bank cannot provide John with any explanation to avoid tipping off. If the money from Nigeria is bona fide this is going to result in a very irate John. His account has been effectively frozen for up to 40 days. 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 the NCA tell the bank it needs more time?
Prior to 2017 the answer was no it could not. A law enforcement agency would have to obtain a court order - a freezing injunction, property freezing order or a restraint order - over John’s assets. However, since the Criminal Finances Act 2017 came into force, a senior officer law enforcement officer can apply to the Crown Court to extend the moratorium period by up to six months. An extension can only be granted by the court if it is satisfied that the investigation is ongoing, the investigation is being conducted diligently and expeditiously, further time is needed to complete the investigation and that such an extension is considered reasonable in all the circumstances. But what does this mean for John? Potentially up to six months of being none the wiser as to why he cannot access the money in his account. The Government have sought to justify this extension on the basis that the previous limit of 31 days did not allow for sufficient time to develop evidence, particularly where it must be sought from overseas through mutual legal assistance.
Figures for October 2015 to March 2017 show that SARS led to over £56 million being restrained in such a fashion. A further £16 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 provided 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 wasn’t) 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.
Shah appeared to open the door for individuals like Dave, challenging SARs and seeking damages where they have been made over zealously. Unfortunately for them, their hopes of succeeding in a claim appear to have been hampered by subsequent case-law. In Iraj Parvizi v Barclays Bank PLC  EWHC B2 (QB) the High Court noted that although suspicion must be more than “a vague feeling of unease”, the law “does not require the suspicion to be ‘clear’ or ‘firmly grounded and targeted on specific facts’ or based upon ‘reasonable grounds’”. Given such a low threshold required to establish suspicion, successful claims are likely to be few and far between
Articles are intended as an introduction to the topic and do not constitute legal advice.