England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION

		Royal Courts of Justice Strand 21st February 2006

1. This case concerns the application of the anti money laundering provisions of Part 7 of the Proceeds of Crime Act 2002 (POCA) and whether the Courts should supervise the operation of those provisions so as to diminish their potentially Draconian effect upon innocent trading companies- The Claimants apply for a mandatory interlocutory injunction requiring the Defendant (the Bank) to comply with the terms of their contract with them by honouring eight payment instructions given by N2J on 7^th and 8^th February 2006, and for an order that the Bank provides information pursuant to CPR 18 about their reasons for refusing to make those payments, in so far as the Bank may lawfully do so.
2. N2J is a wholesale trader of mobile telephones, telephone accessories, computers and peripherals. For the seven months between June and December 2005 its accounts disclose a turnover of £33.25 million, gross profits of £1.66 million and net profits of £1 5 million Ace Telecom Trading Limited is a related company.
3. VAT is payable on goods traded unless they are sold outside the UK and the seller complies with the VAT rules relating to zero rating supplies. If, as is often the case, VAT is paid on goods purchased which are then sold without collecting VAT the dealer is entitled to a VAT repayment The volumes and value of the goods traded by the Claimant companies are large and hence the VAT repayments may be substantial. Thus N2J reclaimed VAT from HMRC, Her Majesty's Revenue and Customs, for £400,476.48 for August. £506,914.27 for September, and £1,000,237.35 for November 2005. These claims were all paid in full by the Revenue without query.
4. The claims made for June and July 2005 were formally rejected and are subject to an appeal to the VAT tribunal. There was a claim made in October 2005 for a total of £2,000,513.03, which was paid in three trenches, £482,171.03, £1,305,060 75 and £213,281 25. But on the 13^th February 2006 HMRC required a repayment of £1,163,718 20 in respects of those payments.
5. A payment of £998,000 was made to the Claimant's bank by HMRC on 16^th February 2006, and HMRC has remitted various payments, and permuted payments to be made whilst refusing others before and since the 8* February 2006.
6. The dispute between the Claimants and the Bank arises out of the refusal by the Bank to honour the eight payment instructions given by N2J on 7^th and 8^th February 2006. Six of these instructions requested payments to accounts in the United Kingdom, totalling £185,000, and one was an international transfer of £716,000 to the N2J account at First Curacao International Bank NV. The Bank received these instructions on 7^th February 2006. The following day, 8^th February 2006, N2J instructed the Bank to pay £2,700 to an account in the UK. None of these transfers have been carried out in spite of numerous requests to the Bank, nor initially was any reason given as to why the transfers had not been made.
7. The transfer of £716,000 is urgent as it is to enable sums outstanding to suppliers and creditors to be met. Further delay in making the payments, and particularly the one for £716,000, may adversely affect N2J's trading. A Chaps transfer by Ace Telecom was also refused on 16^th February 2006 without explanation.
8. The evidence before me, in the affidavits of Mr James Elphinstone-Reed, a director of both the Claimant companies, states that the Banking record of both Claimant companies is exemplary The directors are well aware of VAT frauds, known as carousel frauds, against HMRC, and that these are said to be common in the type of business in which the Claimant companies trade. As a consequence the directors of the Claimant companies have taken considerable steps to ensure that their companies have never been involved in fraudulent transactions and always account properly for VAT.
9. It is now known that the Bank, in accordance with the provisions of the Proceeds of Crime Act 2002, informed HMRC on 8^th February 2006 that they knew or suspected that the funds, the subject matter of the requests for transfer made by N2J on 7^th and 8^th February 2006, were criminal property, If a bank becomes concerned in an arrangement which it knows or suspects facilitates the acquisition, retention, use or control of criminal property it will commit an offence under Section 328 of the Act unless it makes an authorised disclosure to a Constable or a Customs Officer under Section 338. The Bank can then enter into such an arrangement, that is in this case the transfers, only if it has the appropriate consent from the Constable or Customs Officer, Section 228(2)(a).
10. In this case, after the Bank had reported its knowledge or suspicion to HMRC, HMRC considered the matter and on 14^th February 2006 refused consent for the transfer transactions to take place Consent is deemed to have been given if a refusal is not received within seven working days, or if a notice of refusal of consent is served, after a moratorium period of 31 days from the receipt of the refusal notice, Section 335(2), (3) and (4) Here, therefore, the Bank would commit an offence under Section 328 if it authorised the transfers during the 31 day moratorium period which commenced on 14^th February 2006.
11. Further, under Section 333 of the Act, known as the 'tipping off provisions, a Bank would commit an offence if, having made its own disclosure to the Customs and Excise, it then made any other disclosure which was likely to prejudice any investigation that had been embarked upon following its own disclosure.
12. In its evidence before me, the Bank states that it is unable to process the payment requests until the expiry of the 31 days moratorium as consent has been refused, and if it were nevertheless to effect the transfer it would be guilty of a criminal offence under Section 328. Nor can any disclosure of the reasons why the payment requests were not complied with, be answered, nor can the grounds of suspicion that the monies credited to N2J's account were criminal property be specified, because of the 'anti tip off provisions in Section 333.
13. The Claimants acknowledge that Parliament has enacted very strict and Draconian legislation, which can result in innocent traders being prejudiced, but submit that this is an exceptional case in which it is either clear that there is no proper basis for suspicion, or alternatively that the Claimants have a good arguable case that the Bank lacks suspicion In such circumstances it is necessary for the Court to require the Bank, assisted by HMRC and NCIS if that is appropriate, to inform it of the nature of its suspicion in the absence of the Claimants so that the Court can judge whether there are grounds for suspicion, or whether the Bank has, out of cautiousness and fear of prosecution, misdirected itself and merely speculated that there is suspicion when there is none.
14. The Bank submits that this is essentially a contractual matter and where, as here, HMRC has refused consent the Claimants cannot possibly succeed in an argument that the Bank improperly refused to carry out the Claimants instructions. It is clear that they have suspicion and refusal of consent by HMRC shows that that suspicion was reasonable. Thus the Bank either had the relevant suspicion under the POCA regime or was not reasonably satisfied of the lawfulness of the transaction under the banking contract. The relevant clause of the contract states:

"16.3. We may refuse to carry out or allow any instructions or transaction on your account if we are not reasonably satisfied of . (b) the lawfulness of the transaction or instruction. We will not be liable if we refuse to carry out or allow any transaction for these reasons"

15. HMRC submits that the trader is adequately protected by the seven day period and the 31 day moratorium, and that there is no need for the Court to come in during that period to protect the individual. If the trader were able to ask the Court to intervene the whole purpose of Part 7 of the POCA regime would be defeated. Both the Defendant bank and HMRC resist the application for disclosure of documents; such disclosure, it is submitted, is unnecessary for dealing with any issue in the action and it is against the public interest.
16. I have indicated to the parties that in view of the great urgency of this matter I will give judgment today after 1 had heard the Claimants reply to the Defendant's submissions. This judgment will not, therefore, deal as fully with the submissions as the Court would have wished but it remains necessary for me to set out the essential points.

The submissions The Claimants

17. It is essential for the Court to police the boundaries of this legislation to ensure that it does not cause excessive hardship to innocent businesses This is particularly so in view of the following features, the Claimants submit. Firstly, the test or trigger under the POCA regime is low, being suspicion alone. Secondly, there is a potentially punitive effect on lawful businesses. Thirdly, the business affected is unable to know the grounds upon which its accounts are effectively being frozen because of the tipping off provisions and, fourthly, there is no control by the Court.
18. It should be noted, Mr Lazarus submits, that these innocent companies are likely to be without compensation when their accounts are effectively frozen for what proves to be no proper reason. The stronger the power the more astute the Court should be to police its boundaries. The case of C -v- S, Money Laundering, Discovery of Documents [1999] 1 WLR 1551, which applied to the predecessor of the POCA regime, namely the Criminal Justice Act 1993 and the Criminal Justice Act 1988, demonstrates that such a statute does not deny a person of his individual rights.
19. In order to resolve the conflict between the interests of the state in combating crime on behalf of the public and the entitlement of a private body to obtain redress from the Courts Lord Woolf, in C -v- S, stated that unless Parliament had provided otherwise it was for the Courts to decide how conflicts between those interests were to be reconciled He set out guidance in that case indicating, amongst other things, the appropriateness of private hearings in the absence of an Applicant or Claimant where confidential information was being put before the Court in order to persuade it that there would be a real likelihood of an investigation being prejudiced, and a risk of prosecution of those who were obliged to disclose matters to the Court.
20. This authority, Mr Lazarus submitted on behalf of the Claimants, does not appear to have been cited in either of the two cases which have taken a very limited and restricted view of the Court's powers under the POCA regime, namely Squirrel Limited v- Nat West Bank PLC & HM Customs and Excise [2005] EWHC 664 (Ch) , and Quick Car Hire Limited -v-National Westminster Bank Public Limited Company, unreported, 9^th September 2005. Although C -v- S was dealing with an existing right to information granted under the Norwich Pharmacal principle, a similar right to information existed here under CPR 18 as the Claimants are entitled to information as to the grounds of suspicion in this case.
21. The key question here, Mr Lazarus submitted, was whether the Bank had the relevant suspicion. He accepted that the test was a subjective one, namely whether the Bank believed it had reasonable grounds rather than an objective one, namely whether it did in fact have reasonable grounds. Whether it had the relevant suspicion should be tested by the Courts in an exceptional case such as this, where on the known facts there were no apparent grounds for suspicion. The Court should take into account the fact that, firstly there have been no problems at all over the fifteen months the account has been operating secondly, that the money in question consists largely of funds repaid by HMRC after they must have made proper inquiries in order to see whether there was any fraud, and must have concluded that there was not, thirdly, there has been inconsistent conduct by HMRC in that some payments have been permitted after the disclosure, and indeed further repayments made by Customs and Excise to the Claimants bank account; fourthly, the time span of only a few days between about 3^rd February and 8^th February 2006 was too short a time for any suspicion to have been gained.
22. There is, therefore, no basis, the Claimants submit, for suspicion, and the inference can be drawn that the Bank, perhaps out of cautiousness over the money laundering provisions, has misdirected itself. It is this which justifies the intervention of the Court. Mr Lazarus submits that the refusal of consent by HMRC is entirely neutral. It is the suspicion which creates the offence under Section 328 not the refusal of consent, and the question therefore still remains as to whether in the circumstances there was suspicion.
23. As to the contract, the onus of proof was on the Bank to provide some evidence that it was not reasonably satisfied of the lawfulness of the transaction or instruction, and it had produced no such evidence. At no stage does Mr Squires in his affidavit, on behalf of the Bank, state that the Bank was not reasonably satisfied.
24. As the issue between the parties was whether there was a suspicion, and if so whether that was reasonably held under the terms of a contract, that is an issue which the Court would be entitled to investigate under CPR 18 if it were not for the 'tipping off' provisions. Information as to whether the Bank was reasonably satisfied of the lawfulness of the transaction or instruction would clearly be discloseable, the Claimants submit. The Defendant's submissions.
25. Clause 16 5 of the Banking contract entitles the Bank to refuse to carry out any instructions if they are not reasonably satisfied of the lawfulness of the transaction or instructions- This provides a complete answer on the facts to the Claimants case The Bank's view that they were not satisfied, and hence could not carry out the instructions, must be reasonable on its face in view of the fact that HMRC would not permit them to pay That refusal of consent by HMRC must give rise to the inference that the decision was reasonable In any event, under the POCA regime, the test is subjective and once it has been conceded, as it has been, that there is no bad faith on the part of the Bank, the Bank's subjective decision cannot be challenged.
26. Mr Wolfson, on behalf of the Bank, submits that if the Bank had a suspicion the customers protection is that HMRC will not accept that and will give consent for the payment to be made. If they act maliciously or irrationally, that is HMRC, their decision could be challenged by judicial review. There should be, in any event, no grant of any injunction as the balance of convenience is against that. The evidence is not that the company will become insolvent but that it might have to deal on worse terms Damages are the appropriate remedy.
27. Why should the Defendant be exposed to the risk of prosecution and have to argue that it should not be prosecuted as it was ordered to disclose information by a civil Court.
28. As to CPR 18, such disclosure is neither reasonable nor necessary, but merely a fishing expedition The Claimants understand the Bank's case and they do not need any more information. The fact that the test of suspicion is a subjective test supports the proposition that the information is not properly discloseable. The case of C v S has no application here as it applies to a case where, on its facts, a free standing right to information had already been established The Bank is not in any way connected to HMRC but is a private litigant. It is private law not public law which should determine this application.
29. HMRC adopted the Bank's submissions and stated that if the Court did carry out an inquiry it could only do so with special Counsel. The Court would inevitably have insufficient information available before it because it would still be the early stages of an investigation which itself might be prejudiced. It is precisely for these reasons that the 7 day and 31 day periods were created under the statute in 2002, in contrast to the 1993 and 1988 legislation which had no such provision. The 2002 legislation therefore gives adequate protection to the customer. The POCA regime provides the means of balancing the private and public interest by allowing for the 7 and 31 day periods.
30. Mr Hall, on behalf of HMRC, expressed concern that if a Court were to say that there was no adequate suspicion, that could bring an end to an investigation which had not had time to prove itself.
31. Both the Defendant and HMRC relied upon the decisions in Squirrel Limited and Quick Car Hire Limited in support of their analysis of the effect of the POCA regime.

Conclusions

32. The parties rightly accept that the relevant question here is whether the Bank had suspicion, and that that is to be gauged by a subjective test, namely did it believe that there were grounds for suspicion. It is accepted that there was no bad faith.
33. Suspicion was defined in the case of Hussien -v- Chong Fook Kam [1970] AC 942 by Lord Devlin as follows:

"Suspicion in its ordinary meaning is a state of conjecture or surmise where proof is lacking, 'I suspect but I cannot prove' Suspicion arises at or near the starting point of an investigation of which the obtaining of prima facie proof is the end".

It is certainly not proof which is required, as that quote illustrates Indeed it can be seen from the dictionary definition that no more than a feeling or thought is necessary.

34. Mr Lazarus's submissions impliedly accept that only in an exceptional case would it be possible to ask the Court to police the boundaries and enquire as to whether there were grounds for suspicion. I am not satisfied, even if his approach is the correct one, that this is a case which can be described as exceptional. At this stage, when there has been no time for any investigation other than its commencement, the facts are not known Each of the facts presented by Mr Lazarus arc relevant, but they do not lead the observer to say that there is a good arguable case that there cannot be grounds for suspicion.
35. Suspicion does not have to have a long history of misdoing before it arises. It may arise in an otherwise seamless period of good conduct from one important piece of new information. Nor can past, or indeed even subsequent, repayments by HMRC, or permissions or refusals, indicate that there are no grounds for suspicion.
36. I have reached the conclusion that Mr Hall is right in saying that the key difference between the 1993 and 1988 Acts dealt with in C -v- S, and the 2002 Act, is the creation of the 7 day period and the 31 day moratorium. These provide the protection for the customer which Parliament has created. The tension between private interests and public interests have been resolved by Parliament in this manner. It is, in my judgment, a case in which, as Lord Woolf said in C -v- S, where Parliament has provided "otherwise", in other words Parliament has provided by this means a protection for the customer.
37. There may well be cases under this legislation where the actions of HMRC are indeed challengeable by judicial review, but I do not consider that the present proceedings against the Bank seek an appropriate remedy. Firstly, as I have indicated, the key question is whether there is suspicion, and I am not satisfied that there is an arguable case that the Bank lacks such suspicion. I do not regard the refusal of the consent by HMRC as neutral upon this issue, even where they had been making repayments and accepting some transactions and rejecting others. The refusal of consent on its face gives rise to the inference that HMRC consider that there is sufficient merit in the suspicion raised by the Bank to justify at least commencing an investigation into some, but not all, of the transactions It is in my judgment, an important factor in demonstrating that there is no issue to be considered by the Courts here as there is no challenge which can be raised in the circumstances to the subjective view that suspicion exists and is held by the Bank.
38. Secondly, I agree with Mr Wolfson that the contract is decisive here, even though, as Mr Lazarus submits, the burden of proof is upon the Bank to show that they were not reasonably satisfied as to the lawfulness of the transaction. Mr Squires affidavit is short on detail. No doubt because of the fear of prosecution under the 'tipping off provisions, to which he refers in the last sentence of his affidavit. But it is clear from the evidence before me that the Bank reported either knowledge or suspicion to HMRC and that suspicion was prima facie shared by HMRC In such circumstances the Bank are entitled to say that they were not reasonably satisfied that the transaction sought was lawful.
39. Thirdly, if there is evidence that the Bank had a suspicion, and that that suspicion was reasonable, as I have found in this case, there is, in my judgment, no valid reason why they should be obliged to give further information of that evidence thereby asking prosecution under Section 333. The Court will not make an order which results in a party committing a criminal offence.
40. Fourthly, I envisage grave practical difficulties in the Court exploring whether a subjective view of suspicion exists or not. This would of necessity involve the Court either looking at documents or hearing evidence which may prejudice any investigation, thereby defeating the very purpose of the legislation. Where an investigation is at its very early stages it may be disrupted or curtailed or otherwise impeded by an intervention by the Court It is difficult to know in any event, when all that is required is suspicion as the trigger, especially where consent has been refused by HMRC, how the Court would be able to conclude that such a subjective test had been failed. That is the difficulty which this legislation poses. Suspicion may be no more than a feeling based on material which may fall well short of prima facie evidence.
41. Fifthly, I am doubtful that a mandatory injunction is appropriate here in a case where damages are likely to be an adequate remedy in the absence of a risk of insolvency. I have taken into account the information in Mr Reed's second affidavit in stating that conclusion If a second period of 31 days were to be commenced, however, different considerations might well apply, at least to the question of whether in principle a mandatory remedy was appropriate.
42. In any event, I consider that there is no proper basis for the Claimants claims against the Bank. An order that payments be made by them would be wholly inappropriate on the evidence before me when the 31 day moratorium is in force, and for the reasons already given I do not consider that the Claimants are entitled to ask the Court to seek information from the Bank or from HMRC.
43. I accept Mr Wolfson's submission in relation to the order sought under CPR 18. It is neither reasonable nor necessary in the circumstances. There is no issue which would justify making such an order This is not a case where C -v- S applies The guidance there laid down does not, in my judgment, apply to ascertaining whether the foundation for an investigation is sound where the trigger for such an investigation is simply suspicion.
44. I have decided this case on its own facts without reliance upon either the cases of Squirrel or Quick Car Hire. There may well be circumstances, as I have indicated, where a Court should investigate the actions of HMRC under this legislation by way of judicial review. But I am doubtful, as I have earlier expressed, whether an action will lie against the Bank or other institution to challenge its subjective grounds of suspicion where the HMRC have refused consent for the transaction to take place.
45. There are powerful public policy reasons for permitting an investigation which has been properly triggered by a disclosure into a common, widespread and serious potential fraud to continue within the time frame created by the POCA regime If a challenge to the procedure is made, it can, in my judgment, be by judicial review, not action against the financial institution who was obliged to make the disclosure under pain of prosecution The check on an over cautious Bank is firstly the HMRC itself, and secondly judicial review of the HMRC should they act improperly on the Bank's or other institution's disclosure, or otherwise in conducting the matters once the investigation has stalled.
46. For those reasons I dismiss the applications.