Bank of Scotland v A Ltd

[Donald ramsbottom]

Not a crypto case, but a tipping off case, from other legislation regarding
money laundering. It shows how complex things can become and how a
commercial dilemma can lead to the opposit e effect of what the legislation
was trying to achieve.

From Today's Times Law Report. As ever ignore if not interested.



Bank of Scotland v A Ltd and Others (Serious Fraud Office,
interested party)
Before Lord Woolf, Lord Chief Justice, Lord Justice Judge and
Lord Justice Robert Walker
Judgment January 18, 2001
A bank could apply in private to the court for an interim declaration
where, as a result of information received from the criminal
intelligence services concerning money laundering, it feared that if it
paid out money from a customer's account it could be liable to third
parties as a constructive trustee and that, if it did not pay out,
anti-tipping-off legislation would prevent it being able to defend itself
against an action by the customer.

The appropriate defendant to such an application would be the
Serious Fraud Office, not the customer.

The court's power to grant interim declarations was discretionary
and would be used only where there was a real dilemma requiring
the court's intervention. It should not be regarded as a substitute for
financial institutions taking decisions which were their commercial
responsibility.

The Court of Appeal so held in a reserved judgment dismissing the
appeal of the Governor and Company of the Bank of Scotland
against the decision of Mr Justice Laddie to discharge an interim
order made by Mr Justice Lightman on November 16, 1999, as
subsequently varied, against A Ltd, Mr B and C Ltd: see A Bank v
A Ltd and Others (SFO, Interested party) (The Times July 18,
2000).

Miss Geraldine Andrews for the bank; Mr Paul Downes for A Ltd,
Mr B and C Ltd; Mr Jonathan Crow for the Serious Fraud Office.

THE LORD CHIEF JUSTICE, giving the judgment of the court,
said that the issues on the appeal arose out of the provisions of
sections 93A, 93B and 93C of the Criminal Justice Act 1988, as
inserted by section 32 of the Criminal Justice Act 1993, which were
concerned with the offence of money laundering, and section 93D,
which was intended to prevent tipping-off when the police were
investigating money laundering.

The bank contended that the appeal raised issues of considerable
public importance as to the steps which were open to it to protect
itself when, as a result of information which it had received from the
criminal intelligence services, it had grounds for fearing that if it paid
out money from a customer's account it would be exposed to claims
for knowingly assisting a breach of trust.

In September 1999, A Ltd opened sterling and dollar accounts at the
bank. Substantial sums of money were transferred to those
accounts.

The bank became increasingly alarmed. It considered that the
money could have been obtained through prime bank instrument
fraud or something similar.

The bank communicated with the police, the ICC Commercial
Crime Bureau and the British Bankers Association. As a result, it
became aware that investigations were being conducted into
activities closely associated with A Ltd.

The bank believed that it faced a dilemma. If it paid out the moneys
held in the account, it could be liable to third parties as a
constructive trustee.

If it did not pay out the moneys, an action could be brought and it
would not be able to defend itself because the police objected to the
bank revealing what they had told the bank and invoked section
93D.

The bank applied without notice in private to Mr Justice Lightman,
seeking directions as to what it should do. It did not ask for any
form of substantive relief.

In an attempt to assist the bank, Mr Justice Lightman suggested that
he should grant an injunction against the bank, restraining it from
making any payment from the accounts.

The effect of the order was to freeze A Ltd's accounts. A Ltd was
not to see anything which the bank had put before the court in
support of the application, nor the order itself, nor be informed of its
existence.

There was no return date and the order was not expressed to be
subject to any cross-undertaking in damages.

Mr B and C Ltd were joined to the proceedings because they had
been responsible for remitting the moneys into A Ltd's accounts and
they might have claims against the bank in relation to those moneys.

The bank's solicitors wrote to A Ltd: "The bank is unhappy about
certain aspects of the transactions which have taken place on the
accounts. The bank has therefore instructed us to investigate the
matter ... In the meantime, (it can allow no further transactions of
any sort on the accounts..."

If that was the course which the bank wished to take, it did not need
to be subject to an injunction. While it might not be politic to freeze
an account, a bank always had the power to do so.

However, if a bank acted in that way without justification, it would
almost inevitably be subject to proceedings and when that happened
it would be in an acutely difficult position if it was subject to an
order such as that made by Mr Justice Lightman.

A Ltd issued an application to the commercial court, seeking an
order that the sums held by the bank should be paid to A Ltd's
solicitors.

The application was heard by Mr Justice Gray.

A Ltd at that time was still in total ignorance of the order made by
Mr Justice Lightman. However, the bank made submissions to the
judge in private after A Ltd and its lawyers had withdrawn. It
informed the judge of the freezing order.

The judge ordered that unless an application was made by the bank
to the court before January 17, 2000, the bank would have to pay
over to A Ltd's solicitors the sum held by it in A Ltd's account.

The consequences of that hearing, not surprisingly, achieved the
objective which the bank and the Serious Fraud Office wanted to
avoid. It made A Ltd aware that the reason for the hearings in
private was a fear of tipping-off by the bank contrary to section
93D. They became aware that a serious criminal investigation was
under way.

The bank then made another application in private in the Chancery
Division. On January 13, 2000 Mr Justice Neuberger varied the
order of Mr Justice Lightman so that the existence of the Chancery
proceedings could be disclosed. The commercial court proceedings
were stayed by consent. The action in the Chancery Division
continued.

A number of applications were then made to the court, as a result of
which the transcripts of the private hearings in the Chancery
Division and in the Queen's Bench Division were disclosed.

Furthermore, the bank released the money which it held to the credit
of A Ltd's account, apart from a sum which was to remain frozen
with consent because the bank wished to safeguard its ability to
recover its costs.

Therefore, at the hearing before Mr Justice Laddie there was no
longer any issue as to the payment of the sums credited to A Ltd's
account. The issues were as to costs and as to what guidance the
courts could give banks as to the proper practice to adopt in the
future.

The court agreed with Mr Justice Laddie that Mr Justice Lightman
was wrong to grant the injunction. It served no useful purpose and
although the court was in favour of a flexible approach in relation to
the deployment of the orders which a court could make, the court
could not envisage any circumstances when it was appropriate to
grant an injunction against the only party who was seeking relief.

Although the court did not agree with all Mr Justice Laddie's
reasoning, he was entitled to discharge the injunction as a matter of
principle, as well as because it could no longer serve any useful
purpose.

The bank submitted that it had had a reasonable apprehension that it
might be held liable as a constructive trustee and it had acted
reasonably in invoking the court's jurisdiction to give guidance and
directions to trustees. It relied on Finers (a firm) v Miro ((1991) 1
WLR 35).

The court was inclined to the view that it was open to the bank to
seek directions on the footing that it was at least a putative
fiduciary.

However, it was not necessary to express a final view since, with
the development of the court's powers to grant declaratory relief in
appropriate cases, it was no longer necessary for the bank to
establish the status of a trustee in order to obtain relief.

The bank was in a genuinely difficult situation. The mistake it made
was not to recognise that there was no point in obtaining relief
against A Ltd. The appropriate defendant to any application for
directions was not A Ltd but the SFO.

The question of the information which could properly be disclosed
should have been capable of being resolved between the SFO and
the bank, but if they could not reach agreement, then the court
would have to resolve the dispute.

The hearing could have been held in private and there would have
been no question of A Ltd having to be served since it would not
have been a party.

If it was necessary for any order to be made, then the appropriate
order would have been an interim declaration under rule 25.1(1)(b)
of the Civil Procedure Rules 1998. The declaration could set out
what information it would be proper for the bank to rely on.

In determining the terms of any declaration, the court would pay
most careful attention to the views of the SFO as to what would or
would not prejudice its investigation. With the assistance of the
court, in the great majority of cases there was unlikely to be any
difficulty in determining the terms of an interim declaration.

The life of the interim declaration would probably be short since in
the majority of cases it would only be necessary to conceal the
existence of the investigations for a fairly limited period.

The issue as to what information could be disclosed having been
resolved, the bank could then decide what course it wished to adopt.

The bank's primary concern appeared to have been the danger of it
being held a constructive trustee. If the bank chose not to honour A
Ltd's instructions because of that concern, the only course open to
A Ltd was to commence proceedings as it did.

The commencement of proceedings would no doubt be closely
followed by an application for summary judgment under Part 24.
Under rule 24.2, the court would only give judgment to a claimant if
it had no real prospect of successfully defending the claim or issue
and there was no other reason why the case or issue should be
disposed of at a trial.

To oppose an application for summary judgment, the bank would
have to draft its evidence with particular care. Here any advisory
interim declaration would assist the bank.

Section 93D was an exceptional statutory provision to deal with an
exceptional public interest.

It was of the greatest importance that the police should be
supported by financial institutions in their attempts to prevent money
laundering and to detect it when it happened.

When a financial institution co-operated with the authorities, the
courts should be sympathetic to an application for its assistance, if
assistance was really necessary.

It was hard on the bank that under the order of Mr Justice Laddie it
had not only had to bear its own costs, but it had also had to bear
the costs of the parties against whom it brought its proceedings. But
Mr Justice Laddie was perfectly entitled to make that order.

As was not known at the time but was now known, there was no
ground on which the bank could properly refuse to make payments
of the sums due to A Ltd on their accounts.

Because of the nature of the bank's business, it was more
appropriate that it should pay the costs of A Ltd and the other
defendants than vice-versa.

Mr Justice Laddie had provided standard directions with the
objective of avoiding such problems in the future. The guidelines
might be of assistance to parties in the future but the court preferred
not to endorse them.

The court preferred to confine its guidance to what was self-evident
from its judgment.

First of all, there should be no question of an injunction being
granted in the circumstances in which it was granted in this case.

If there was a dispute as to whether a payment could be made or
disclosure made by the bank, the SFO, on behalf of the police, and
the bank should try to resolve it between themselves. If they could
not do so, that could be the subject of an application for interim
declaratory relief.

Unless the SFO acted unreasonably, it was likely that the parties to
the application would have to pay their own costs.

If proceedings were brought by a customer of the bank, the bank
would have to take a commercial decision as to whether to contest
the proceedings or not. If the proceedings were to be contested,
then they should be conducted as openly as possible.

Consideration should be given as to whether it was desirable for the
judge who heard any proceedings against the bank to be different
from the judge from whom guidance was sought.

The answer would depend upon the circumstances of the particular
case. It was possible, however, to envisage circumstances where
the best method of achieving justice would be for the same judge to
hear both sets of proceedings.

If there were proceedings of which a bank's customer was
unaware, then at least if the bank acted in accordance with
guidance given by the court, there would be no question of it being
subject to criminal proceedings.

The tipping-off legislation gave extensive powers to the police. It
was of the greatest importance that use of those powers was
confined to situations where it was appropriate.

Institutions such as banks needed to be able to ensure that they
were not affected adversely unnecessarily because of the existence
of the police powers. The ability of the courts to grant interim
advisory declarations achieved that purpose.

The fact that the courts now had those powers must not, however,
be regarded as a substitute for financial institutions taking the
decisions which should be their commercial responsibility.

The court's powers were discretionary and only to be used where
there was a real dilemma which required their intervention.

The use of the court's power to grant interim declarations in
proceedings involving the SFO would protect a bank from criminal
proceedings but it would not automatically provide protection against
actions by customers or third parties.

However, it seemed almost inconceivable that a bank which took
the initiative in seeking the court's guidance should subsequently be
held to have acted dishonestly so as to incur accessory liability.

The involvement of the court should enable, in the great majority of
cases, a practical solution to be determined which protected the
interests of the public but allowed the interests of a bank to be
safeguarded.




Donald Ramsbottom BA LLb (Hons) PGdip
Ramsbottom & Co Solicitors
Internet and Global Encryption Law Specialists & General UK  Law Matters
5 Seagrove Avenue Hayling Island Hampshire UK
Tel (44) 023 9246 5931 Fax (44) 023 9246 8349
Regulated by the Law Society in the conduct of Investment business
Service by Fax or Email NOT accepted