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When criminal law affects your obligations to others

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Looking back at 2019 there were a number of interesting English civil court rulings which highlighted the difficulties faced by a party trying to balance obligations (e.g. to a contractual counterparty, a customer or to the court) when there is suspected criminality or a clash with foreign criminal law. Here are four which we found interesting:

Terminating customer relationship on suspicion of financial crime / money laundering

Banks concerned about their obligations in respect of preventing financial crime and mitigating money laundering risk will have welcomed the decision in N v The Royal Bank of Scotland [2019] EWHC 1770 Comm.  RBS had a contractual right to terminate a customer relationship without notice if it considered there to be exceptional circumstances. The court held that RBS was entitled to exercise this right where RBS suspected that the customer accounts were vulnerable to fraud and money laundering. While each case will need to be decided on its facts, banks should ensure that they take appropriate advice before making decisions to terminate and should document their decision-making processes. Measures which are less extreme than termination should be taken into account in a bank’s decision-making process.  Permission to appeal this decision has been granted.

Breaching confidentiality to report suspected criminality?

Saab & Anor v Dangate Consulting Ltd & Ors [2019] EWHC 1558 (Comm) provided clarity on when, and how, it is appropriate to breach confidence to report suspected criminality. Private investigators were engaged to conduct an independent internal investigation into alleged money laundering at FBME. The retainer contained strict confidentiality provisions including a duty to notify FBME’s lawyers before disclosing confidential information to third parties and to deliver up confidential documents if requested by FBME’s lawyers/owners. Having fallen out with FBME, the investigators gave all the documents and information obtained from FBME to a US regulator and other law enforcement agencies. When they were sued by the owners of FBME for breach of confidence, the investigators relied on the public interest defence. The court held that the investigators were in breach and made the following findings: the public interest defence is available in respect of regulators but not law enforcement agencies; the defence was not available in respect of the notification and deliver up confidentiality provisions; and a wholesale document dump of all the information they had gathered (as opposed to focussed disclosure) was not justified on public interest grounds.

Key takeaways are that targeted disclosure is more readily justifiable on public interest grounds and that, for parties seeking to protect confidential information when disclosing to third parties, express confidentiality agreements which include notification and deliver up provisions are advisable.

English law disclosure obligation clashes with foreign criminal law

Bank Mellat found itself between a rock and a hard place in Bank Mellat v HM Treasury [2019] EWCA Civ 449 where compliance with a disclosure order of the English court would have placed it in breach of Iranian criminal law. In holding that disclosure should be given, the Court of Appeal undertook a balancing act between, on the one hand the risk of prosecution in Iran (it concluded that there was an actual risk but that it was less serious than Bank Mellat suggested because no relevant examples of past prosecutions had been given), and on the other, fair disposal of the trial. The court observed that where a court order might entail a breach of foreign law, it would not make such an order lightly but also emphasised that “foreign law cannot be permitted to override this Court’s ability to conduct proceedings here in accordance with English procedures and law”. This is consistent with previous cases which, for instance, have ruled that the French Blocking Statute does not trump orders for disclosure in the English courts.

Bank breaches Quincecare duty

The Quincecare duty is implied into bank/customer relationships and requires a bank to refrain from executing an order to transfer funds where there are reasonable grounds for believing that the order is part of a scheme to defraud a customer. Despite the duty having been established over 30 years ago, Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 marks the first time a bank has been held to have breached it.

Singularis’ liquidators claimed that the bank had made payments from Singularis’ account in breach of its Quincecare duty. The payments had been made on the instructions of a fraudulent Singularis director. On appeal to the Supreme Court, the bank argued that the director’s fraudulent conduct should be attributed to Singularis which would engage, amongst other things, the illegality defence in favour of the bank. The Supreme Court dismissed the appeal, holding that the question of attribution required consideration of the context and that the fraud was not to be attributed because the very purpose of the duty was to protect customers where trusted agents, such as the director, misappropriated funds. To allow for attribution would “denude the duty of any value”.

Breach will be rare (e.g. in Singularis, the judge had found at first instance that there were “many obvious, even glaring, signs” of fraud) but this case confirms that the duty is not inert. The duty can in principle be excluded however the courts have suggested that clear express words are required and standard entire agreement or exclusion clauses are unlikely to be sufficient.

These cases were also covered in Top UK finance litigation and contract law developments of 2019 by Oliver Rule (Counsel) and Mohamed Sacranie (Trainee Solicitor).