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18 February 2020
The High Court has rejected an application for summary judgment of a claim to release money frozen by a bank. This was in the context of an investigation into the alleged use of the account for criminal activity. In its defence, the bank argued that the customer agreement contained an implied term that the bank could act on evidence of suspected fraudulent conduct to suspend operation of the account. The case demonstrates that where there is evidence of a possible fraud (even without evidence of an investigation by the Hong Kong authorities), in order to avoid a full hearing at trial, an account holder will need to present strong evidence that the funds are not part of the alleged fraudulent scheme.
In Crown Aim Ltd v UCO Bank,(1) the plaintiff company challenged the bank's suspension of its accounts, pending an investigation into whether the accounts were implicated in a substantial fraud alleged to have taken place in India.
The defendant is an Indian bank with a branch in Hong Kong. The plaintiff Hong Kong company is in the diamond trading business, an indirect subsidiary of a group holding company being investigated by the Indian authorities, and a holder of three accounts with the defendant bank.
In February 2018 the authorities in India put several banks (including the defendant bank) on notice of a suspected substantial fraud in India involving the group holding company and a director of the plaintiff's immediate parent company. There was no evidence of a related investigation by the authorities in Hong Kong. On 20 February 2018 the bank's head office issued instructions to all of its branches concerning the suspected fraud and required them to stop all debit transactions from the accounts of several designated companies, including the plaintiff and its immediate parent company. The bank's Hong Kong branch suspended the operation of the plaintiff's three bank accounts.
In September 2018 one of the plaintiff's accounts was credited with a substantial sum of money (in US dollars), which appears to have been the only significant funds in the three accounts. The plaintiff alleged that the sum represented the purchase price paid by buyers in Belgium for a genuine diamond trade.
The plaintiff asked the bank to release the funds and issued proceedings when the bank refused to carry out its instructions. The plaintiff argued that it had a right – as a customer of the bank, and as a creditor under the principles of banking law – to withdraw the principal sum. It applied for summary judgment of its claim to release the funds, arguing that the bank could not show a credible defence and that there was no triable issue of fact or law nor any other reason justifying trial.(2) The plaintiff provided evidence of the transaction underlying the transfer of the money in the form of a service order form and a sales invoice.
The bank argued that it had a credible defence and, therefore, summary judgment was inappropriate. It relied on an alleged implied term in its customer agreement that once it had been put on notice that an account was being used, or may be used, in furtherance of alleged fraudulent or other criminal activity, it could suspend the operation of an account pending completion of its investigations. The bank argued that the implied term was justified to allow it to comply with its legal and regulatory obligations to combat financial crime and protect against fraud. There does not appear to have been an express term to that effect, as has been used by other banks.(3)
The main point for determination by the court was whether the plaintiff's claim for the release of the money was sufficiently made out to entitle it to summary judgment, or whether the case should be allowed to proceed to trial. As the plaintiff presented it, this turned on three issues:
In an instructive decision, the court rejected the plaintiff's application for summary judgment and granted the defendant unconditional permission to defend the claim.
The court found that a legal issue had arisen as to the existence of an implied term and that, on the facts, the bank had provided enough information (at this stage) to support its contention that the accounts may be implicated in a fraud.
The court recognised that there were legal issues about the implication of a term into a bank/customer contract that allows a bank to suspend accounts in the face of possible criminal activity. While previous case law has considered a bank's express terms allowing suspension of accounts in such circumstances, there does not appear to have been a Hong Kong case that concerned implied terms to the same effect.(4) In this case, the court considered that there was a triable legal issue as to whether an implied term existed and whether the term applied on the facts of the case.
The court considered that the bank had provided sufficient information to demonstrate the existence of investigations by the relevant Indian authorities (including into the group holding company), even though the bank had not provided much in the way of specific details regarding these investigations. The lack of investigation by the Hong Kong authorities did not affect the court's decision – the bank's risks and liabilities in its home jurisdiction, where the authorities were stated to be conducting "a very substantial investigation", might still be substantial.
The court also accepted that, in the context of the evidence of potential fraud, the plaintiff should have provided more evidence of the relevant transaction and how the suspension had affected its business.
Therefore, the bank was entitled to defend the case at trial.
The court noted that there was some force in the plaintiff's criticism that the period of the suspension did not appear to be time limited, but this did not affect the existence of a triable issue.
This was a decision on a summary judgment application and needs to be read in that context. However, it illustrates the hurdles that an account holder will face in trying to force the release of funds frozen by a bank due to allegations that the account is implicated in a fraud, at least without going to full trial.
While each application turns on its facts, it appears that a bank can argue that it has a credible defence relatively easily where it can point to the potential implication in a fraud being investigated by authorities (not only the Hong Kong authorities). To obtain the release of funds, an account holder will need to provide "a very full explanation" of specific transfers and the transactions underlying them, and how the suspension of the account is affecting its business.
The courts recognise the difficulties that can confront a bank that is put on notice of suspected criminal activity and, therefore, suspends the operation of a customer's account. Since April 2012, financial institutions in Hong Kong have been subject to tougher anti-money laundering laws and many banks have updated their account operating terms to include express terms that allow them to suspend a customer's account pending internal anti-money laundering and counter-terrorist financing investigations. Such terms will evidently not exist in every case.
The issue of what is a reasonable period of suspension is also interesting, but fact dependent and not one that changed whether there was a triable issue in this case.(5) Banks will, however, need to be able to justify the suspension of a customer's account. The reasons for originally suspending an account and ongoing reviews of the suspension will provide a fertile ground for enquiry by a customer challenging the suspension.
For further information on this topic please contact Jonathan Crompton or Antony Sassi at RPC by telephone (+852 2216 7000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(3) See, for example, Pa Sam Nang v HSBC Ltd, HCA 1020 of 2015, 7 March 2016 (for further details please see "Disputes over bank's contractual right to freeze customer's account").
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