The law of unintended consequences - money laundering in civil cases

May 2016 FEATURE CASES The law of unintended consequences - money laundering in civil cases Money laundering may be the substantive issue in civil litigation or collateral to the main case and it is then, especially, that one needs to tread with care, finds Jonathan Fisher QC. Although the concept of unintended consequences is one of the building blocks of economics, there is no doubt that the concept applies equally to the discipline of law. But unlike Adam Smith s notion of a positive unintended consequence where the public interest is promoted by the unintended result, this is not always the case in law where the unintended consequence is attributable to the legislator s lack of foresight. This is precisely the position which has arisen in the context of anti-money laundering where the consequences of non-compliance with the regulatory regime have had an unforeseen adverse impact. There are also circumstances where the proper application of the anti-money laundering regime can have harmful consequences which were not envisaged at the time when the anti-money laundering legislation was enacted. Much litigation involving money laundering has arisen in the criminal context, where a person has been charged with a money laundering offence and the court is required to rule on the constituent elements of the criminal offence and the sufficiency of evidence needed to sustain a conviction. Likewise, in the administrative context it has fallen to the regulatory authorities and tribunals to set down the compliance requirements of the anti-money laundering regime and the standards of customer due diligence which are to be expected. The criminal and administrative response of the courts, the regulatory authorities and their tribunals has been well rehearsed and fierce debate will continue about certain aspects, such as whether the threshold meaning for suspicion has been set too low or whether the criminal offences should have extra-territorial effect, so that a person can be tried for money laundering acts committed abroad if the criminal property derives from criminal conduct committed in the United Kingdom but not elsewhere. However, it is in the context of civil disputes coming before the High Court that the rule of unintended consequences has been seen to operate, and the purpose of this article is to explore how these issues have arisen and the way in which they have been resolved by the courts. It is difficult to develop a thematic critique of these cases since in some cases the application of the anti-money laundering legislation is the central issue before the court, whereas in other cases the application of the anti-money laundering regime has arisen as a secondary issue, albeit with relevance to the court s determination of the principal issue in the case. With this in mind, I have divided the cases into two broad categories. The first category is where the money laundering is a substantive issue which requires determination, and the second category is where the money laundering is a collateral issue which impacts on the resolution of the substantive issue. Moreover, as already indicated, the categorisation is further complicated by the fact that in the second category the impact of the anti-money laundering legislation is sometimes positive, and on other occasions negative, on the outcome of the case which is before the court. Follow us on Twitter @mlbulletin and join discussions in our LinkedIn group

Substantive issues Challenging a refusal to grant consent to proceed Initially, the cases which came before the civil courts raised substantive issues relating to the application of the anti-money laundering regime in the commercial context, typically, where a party sought to challenge the intelligence authority s refusal to grant consent for transactions that had been reported as suspicious. The name of the intelligence authorities has mutated from the National Criminal Intelligence Service (NCIS), through to the Serious Organised Crime Agency (SOCA) and now the National Crime Agency (NCA). In Amalgamated Metal Trading v City of London Police [2003] EWHC 703 (Comm), the claimant was a financial institution and sought declaratory relief in relation to funds which were suspected of constituting the proceeds of crime. The claimant had applied for consent to transfer a balance in favour of the defendant on its books from the Financial Investigation Unit of the City of London Police. The police declined to give consent to release the funds back to the defendant. The claimant then sought an interim declaration from the High Court on the grounds that they did not have sufficient suspicion that the funds represented the proceeds of crime. The High Court distinguished Bank of Scotland v A [2001] 1 WLR 751 and held that it was inappropriate to grant such relief. The decision as to whether the money did or did not represent criminal property had to be determined at trial. The court held that the police had been right to refuse consent. Another case where the substantive issue related to the challenging of a decision not to grant consent for particular banking transactions was R (UMBS Online) v SOCA [2007] EWCA Civ 406. Here, the claimant challenged SOCA s decision not to revisit the issue of consent in relation to a bank carrying out a transaction on behalf of a customer. The question arose as to whether the Court could order SOCA to disclose information in relation to an ongoing investigation, and whether the bank should be able to disclose this information to the customer. The Court of Appeal, following K Ltd v National Westminster Bank Plc [2006] EWCA Civ 1039, held that it could not require SOCA to disclose its reasoning for coming to a decision or the bank to disclose information to its customer if this might be likely to prejudice the investigation. It was decided that the Court cannot require a banker who makes a disclosure, to further disclose information, if this disclosure would prejudice the investigation. The Court held that SOCA was wrong not to revisit the issue of consent as it was accepted by SOCA that the issue of consent must be kept under review. There are a number of other cases in which similar issues have come before the civil courts see C v S [1998] 1 WLR 1551; Bank of Scotland v A [2001] 1 WLR 751, Tayeb v HSBC [2004] EWHC 3773, K Ltd v National Westminster Bank [2006] EWHC Civ 1039; Shah v HSBC [2012] EWHC 1283 and Parvizi v Barclays Bank [2014] EWHC B2 (QB). De-risking More recently, the civil courts have been preoccupied with cases which have arisen in the context of the discussion over de-risking. This has tended to arise where a bank has terminated a customer s banking mandate because it does not want to run the risk of committing a money laundering activity and the client, typically a money transfer bureau, is exposed to being used for high risk money laundering activity. In N v S and the National Crime Agency [2015] EWHC 3248 (Comm), the claimant sought a mandatory interim injunction against a bank to compel the bank to continue to afford the claimant use of its banking facilities. Both the claimant and the bank agreed that if an interim injunction was granted the High Court should also make an interim declaration to protect the bank against the risk of potential criminal liability which could flow from the continuing provision of its banking services. Applying the principles in Bank of Scotland v A, the High Court granted the interim injunction in favour of the claimant, finding on balance that there would be greater prejudice to the claimant if the interim injunction was not granted. An interim declaration to protect the bank against potential criminal liability was also given. Similarly in Dahabshiil Transfer Services v Barclays Bank [2013] EWHC 3379, the claimants sought an interim injunction to restrain the bank from withdrawing its services until the substantive claims were tried. The Courts did not make any determination as to the alleged criminality of the underlying transactions in either case. Collateral issues As already noted, where the application of the antimoney laundering regime has been raised in a civil case as a collateral issue, its impact on the outcome of the case may be positive or negative, depending on the perspective of the litigant. The fact that a party has satisfied the anti-money laundering requirements generally has a positive impact on the outcome of the case. Conversely, the negative impact on the substantive issue at trial will arise where a breach of the anti-money laundering regime has occurred. Using conviction for money laundering offences in a civil action to establish illegality Nigeria v Santolina Investment Corp [2007] EWHC 3053 (QB) is an example of a case where a money laundering conviction had a positive impact on the outcome of a civil action. In this case, the applicant applied for summary judgment in order to recover assets that were allegedly 2 Issue 233 May 2016

accumulated by a former state governor as a result of the receipt of bribes. Between the first application for summary judgment, which failed, and the second application which was before the court, the respondent acting on behalf of his company had pleaded guilty to various money laundering offences in Nigeria. In the light of this conviction, the applicant s submission that it was the true owner of the laundered property was significantly strengthened. The High Court held that the guilty plea amounted to a change of circumstances and eliminated any possibility of an arguable defence by the respondent. Accordingly, summary judgment was granted in favour of the applicant. Failure to satisfy AML requirements undermines credibility Where a party has failed to satisfy the anti-money laundering requirements, the failure can be deployed during the course of a civil action to undermine a person s credibility. This is illustrated in the case of Jeremy D Stone Consultants Ltd v National Westminster Bank Plc [2013] EWHC 208 (Ch). Here, the High Court considered whether automated anti-money laundering monitoring systems were sufficient to monitor transactions for detecting suspicious behaviour. The claimants alleged that the bank, by placing exclusive reliance on the automated monitoring system, had failed to identify the fact that the defendant was perpetrating a Ponzi fraud. It was the claimants case that the bank had failed to perform its obligation of ongoing monitoring under the Money Laundering Regulations 2007 (the Regulations). The High Court had to determine whether this assertion was correct, and if it was, whether the bank was exposed to responsibility as a constructive trustee as a result of its perceived carelessness. The High Court held that relying on an automated monitoring system was sufficient to satisfy the Regulations, noting that only in exceptional circumstances would manual monitoring be required. It was established that a breach of antimoney laundering legislation would not, in isolation, be regarded as grounds for civil liability. However, it can clearly be extrapolated from the principles applied by the court in this case that circumstances could arise in which a failure to comply with the Regulations could be deployed by a litigant in a similar position to the claimant when bringing action for constructive trustee liability against a bank. Indeed, there is no reason why a failure to comply with the requirements of the Regulations could not be deployed to undermine the credibility of a witness in other circumstances. Trust monies allegedly tainted by allegation of criminality Money laundering issues can become relevant in trust cases where there is a suspicion that the trust funds have been contaminated by some perceived criminality. In IPOC v LV Finance Group, 22/11/04 unreported, the Court of Appeal in the British Virgin Islands considered whether funds paid into court totalling $40 million could be used as security for damages and costs where the money was suspected to have been derived from criminal activity. In short, it was alleged that the defendant s funds had been derived from a money laundering scheme which he had been operating. The concern was that if the monies were paid out as damages and costs, the recipient party could become liable as a constructive trustee in relation to the monies. It was held that as a matter of public policy the Court should not permit utilisation of funds which are criminally tainted. In this case, the Court of Appeal found it unnecessary to express a view on the alleged criminality of the funds. The court held that the funds which had been paid into court could be used for damages and security for costs, and that any party who took receipt of the funds would not be deemed a constructive trustee. Another case where money laundering became relevant in trust proceedings is Kingate Global Fund v Knightsbridge Fund Ltd, 19/11/09, unreported. Here, the Court of Appeal in Bermuda had to consider the position where the respondents had paid $9 million into a bank account for the purpose of purchasing shares in an investment fund. When the fund collapsed after it was discovered that the investment was in fact a Ponzi fraud, the question arose as to whether the liquidators of the investment fund could claim entitlement to the $9 million sitting in the bank account which had not been paid over to the fund. The answer depended on whether the monies were beneficially owned by the respondents, since if so, the monies would have been held in a special purpose trust and therefore unrecoverable by the liquidator. In answering this question, the Court of Appeal was heavily influenced by the fact that the fund administrator had the power to accept or reject the subscriptions that were paid into the fund if the customer due diligence requirements regarding the source of funds could not be satisfied in accordance with the anti-money laundering provisions. It followed that if these requirements could not be satisfied, the money would be returned as soon as possible. This factor alone pointed heavily in the direction of the money being held in the bank account in the form of a special purpose trust. Accordingly, the appeal was dismissed. Action in contract tainted by allegation of criminality Since a breach of the Regulations constitutes a criminal offence, the criminality may operate to vitiate any arrangements which have been made between contracting parties. The circumstances in RTA (Business Consultants) v Bracewell [2015] EWHC 630 provide an Informa UK Ltd 2016 3

interesting illustration of this principle. The defendant instructed the claimant as an agent for the sale of his businesses. Under the agreement the defendant had to make a commission payment of 40,000 and pay a non-refundable registration fee of 9,000. There was an option to revoke the agreement within the 12-month agency period which was conditional on the fact that at the time nobody was expressing an interest or negotiating to purchase the businesses. Having paid three instalments totalling 3,000, the defendant informed the claimant that he wished to take the businesses off the market and let the properties instead. The claimant submitted that the agreement to let the property triggered the defendant s liability to pay the commission, as it amounted to the disposal of the property within the terms of the agreement. The claimant issued a claim for the commission and balance of the registration fee, and there was a counterclaim by the defendant for the repayment of the 3,000 he had already paid. Th e money laundering issue arose because the High Court had to consider whether the entire agreement between the parties was void as the claimant had breached Regulation 33 of the Regulations by failing to register as someone carrying out estate agency work. The High Court found that as the claimant had failed to register with the Office of Fair Trading in accordance with the Regulations, the contract was void for reasons of illegality. Therefore, both the claim and counterclaim were dismissed. Another case where money laundering crept into a contractual dispute was Nomihold Securities v Mobile Telesystems Finance [2011] EWHC 2143. The respondent had sold the applicant a company that was registered in the Seychelles under a share purchase agreement. Under the terms of the agreement, the respondent exercised its entitlement to sell the remaining shares under a put option. A dispute arose between the parties over the sale of the remaining shares, focusing on the applicant s desire to remove itself from the obligation to purchase the remaining shares. The parties agreed to arbitration and the arbitrators found in favour of the respondent, and so the purchase price became due and payable. Subsequently, the applicants sought to set aside a Court order enforcing the arbitration award on the basis that as there were allegations of money laundering in the Seychelles it ought not to be enforced due to public policy. The High Court recognised that there was a high threshold to surmount before the Court will not enforce an award on the basis that it would be contrary to English public policy. In this case, the non-registration of the share transfer did not amount to a reason why the award should not be enforced and therefore the money laundering issue fell away. The application not to enforce the Court order was refused. Satisfaction of AML requirements supporting credibility of parties By satisfying anti-money laundering regulations, a party can bolster his credibility. In Adelaide Partnerships v Davison [2011] EWHC 4090, the first defendant had pleaded guilty to a fraud against the claimant. The claimant sought to make the seventh defendant liable as an accessory in respect of this fraud. The seventh defendant was a money lender who operated mainly within the Orthodox Jewish community. The seventh defendant had complied with the Regulations when transferring the funds that were part of the first defendant s fraud. The High Court considered whether a party could be required to make additional enquiries in excess of the regulatory requirements in order to avoid being found liable as a constructive trustee on the basis of dishonest assistance. It was held that although there may have been circumstances that might have caused the seventh defendant to become suspicious, it would too burdensome to require a person carrying out a genuine business to go further than the Regulations required. A similar point was made in J D Wetherspoon v Harris [2013] EWHC 108 where it was said that it was not sufficient to infer dishonesty for constructive trustee liability purposes merely from the fact that a transaction was consistent with possible money laundering. Turning a blind eye to AML requirements In contrast, where a party has wilfully turned a blind eye to satisfying the anti-money laundering requirements, a Court will not hesitate to infer that the party was acting dishonestly for the purposes of establishing liability as a constructive trustee. In Armstrong DLW v Winnington Networks [2012] EWHC 10, the claimant was the operator of two factories. As a result of the works of these factories he had been credited with carbon allowances (EUAs) which were held in an account with the German registry. EUAs are electronic, and trading takes place through different accounts in other Member States. The defendant company traded in EUAs and was approached by a company in Dubai offering to sell EUAs. The claimant s username and password were fraudulently obtained and used to transfer EUAs from the claimant s account to the defendant s account in the United Kingdom. Subsequently, the defendant sold these EUAs and paid the Dubai company for them. As a result of this, the claimant brought a claim against the defendant company in restitution or as a constructive trustee on the basis of knowing receipt. It transpired that the defendant company had not complied with the due diligence procedures, and had failed to obtain sufficient information about the EUAs and the company. The defendant had failed to make 4 Issue 233 May 2016

the enquiries that an honest and reasonable person would have made in order to prevent money laundering and/or fraud. Therefore, in these circumstances the High Court held that the failure to obtain relevant information led to judgment being ordered in favour of the claimant. The defendant was either wilfully shutting one s eyes to the obvious or at the very least wilfully and recklessly failing to make such enquiries as an honest and reasonable man would make per Deputy High Court Judge, Stephen Morris QC, at paragraph 283. Jonathan Fisher QC is a practising barrister at Devereux Chambers in London and a Visiting Professor in Practice at the LSE. ( www.jonathan-fisher.co.uk ) Informa UK Ltd 2016 5