When is a bank not a bank? The answer is: when it becomes an undercover bank, keeping in touch with government investigators and unable to m...

When is a bank not a bank? The answer is: when it becomes an undercover bank, keeping in touch with government investigators and unable to manage the suspects’ accounts in the normal way. This can happen if it volunteers to attract money-launderers in a US-style ‘sting’ operation; or it can happen when the chaotic money-laundering laws of some Anglo-Saxon countries put it in an impossible situation. In this article, written in July 2000 when The Bank v A surfaced as a major case, Jonathan Pickworth of DLA looked at the trial judgment on the subject. Even though the court in this case did its best to answer some tough questions, the undercover bank still faces legal danger from both the suspected launderer and the criminal authorities. If a bank suspects that monies in its accounts are the proceeds of serious crime and tells the authorities, its officials can spend five years in prison if they “tip off” the customer and prompt his to suspect that a money-laundering investigation is underway. There are even more serious consequences if a bank with those suspicions continues to operate the account (thereby assisting the launderer), unless the bank has permission to do so from a police constable. To make matters worse, the bank could also (in some circumstances) have a liability to repay the laundered money to its rightful owners. So how should banks cope with this intolerable but increasingly common situation? This was the question in The Bank v A Ltd and Others, a decision handed down by Mr Justice Laddie on 23 June 2000. In September last year, A Ltd became a new customer at an unnamed bank. The bank carried out its usual ‘know your customer’ and client identification procedures and allowed A Ltd to open sterling and dollar accounts. Large transfers to the dollar account totalling over US$1.2 million were made, and this seems to have caused alarm bells to ring at the bank. After making enquiries about A Ltd, the bank concluded that the transfers might represent the proceeds of a prime bank instrument fraud. The bank also approached the Metropolitan Police and learnt from them that A Ltd was, in fact, being investigated for fraud. The bank became concerned that it might be liable as a constructive trustee to the true owners of the funds if it paid the monies out on the instructions of A Ltd, but was equally concerned that refusing to deal with the account could be tantamount to the offence of ‘tipping off’. Not knowing quite what to do, the bank applied to a court in November 1999 for an appropriate order. The court suggested a freezing order (the modern version of a Mareva Injunction), but also said that it must be issued on the understanding that the bank would not tell A Ltd that the account was now frozen. The bank accepted the court’s suggestion and an order was made. Subsequently, A Ltd found out that its account had been frozen and applied to the Commercial Court for an order requiring payment of the sums held by the bank to A Ltd’s solicitors. A Ltd put evidence before the court of its good standing; there was no evidence to suggest that the monies in the account were tainted in any way. The bank was unable to put any evidence before the Commercial Court (because the original court order prohibited it from disclosing any details to A Ltd) and consequently an order was made which required the bank to hand over the monies. The bank was therefore left in a worse position than at the outset - one court order required it to freeze the account; the second required it to pay out the monies. Not surprisingly, the bank found it necessary to make a further application to court, seeking a further order and its costs. There was lengthy argument before Mr Justice Laddie on the respective merits of each party’s case. The court noted, however, that although the bank had suspected that money-laundering was taking place, no wrongdoing could be proved. A Ltd might be a perfectly innocent customer. The court declared the injunction discharged and ordered the bank to pay the costs. According to the judge, the bank had ‘no rationale’ for transferring a business risk such as this to its customer. Such a risk, he said, was inherent in the running of a bank. Recognising that the bank had felt that it was in an impossible position, Mr Justice Laddie offered some guidance to help banks deal with situations of this type in the future. Generally speaking, he said, a bank has two options - it can pay the money away when instructed to do so by the customer or it could treat the account as frozen. Dealing with each option in turn, the judge’s main points were as follows. If the bank wants to make the payment The bank should ask ‘a constable’ for permission to do this. In practice this involves asking the National Criminal Intelligence Service. The bank should then tell NCIS that if it fails to respond to the request or to grant permission for the payment, the customer will probably commence proceedings against the bank and, in turn, be able to work out for himself that he is the subject of a money-laundering investigation. It is also likely that if NCIS fails to allow the bank to pay, the court will order ‘the constable’ to appear before it to justify his position. In the absence of any material which justifies non-payment, the court is likely to make an order for payment anyway. If permission is given by the constable, the bank will be committing no offence if it continues to manage the account. If the constable refuses permission and the bank still wants to make payments, it should apply to the court in private and invite the constable to attend to justify his refusal of permission. The judge should be asked to decide what information, if any, can be disclosed by the bank to the customer if any proceedings are commenced. If the constable still does not give permission, the institution should not make payment - to do so could constitute a criminal offence. If the bank does not wish to make a payment The bank may want to avoid making a payment for fear of “assisting” a money launderer or for fear of its potential liability as a constructive trustee. The bank should not take private, pre-emptive action to freeze the customer's account. Instead, it should notify the constable that it does not want to make payment. It should tell him that it expects the customer to ask it to do so. It should then ask the constable to describe the kind of information it is allowed to pass on to the customer in the event of any subsequent court proceedings being brought by the customer to enforce payment. If the constable (NCIS) obliges with a full explanation, the bank will at least know what information it can use if it has to defend itself against the customer in court. If no consent for the disclosure of information is forthcoming, however, the bank must file an application to the court and the constable will have to appear before the court to justify his position. If the court orders payment, the bank must comply with the order and will not, in doing so, be liable as a constructive trustee. This is a short summary of a reasonably lengthy judgment which contains other specific guidance and helpful pointers. It is a delicate area of the law for banks, which are frequently exposed to criminal and civil liability. Any institution which finds itself in this dilemma should always ask for legal advice before it decides what to do. It is interesting to note in The Bank v A Ltd that, although the original freezing order was made at the suggestion of the court (and not at the request of the bank), the bank was still liable for the costs and damages which flowed from the wrongful issuance of the injunction. No doubt there will be further developments in this area of the law over the coming months.