Bank customers who lose out when a transaction is delayed because of money-laundering suspicions have won the right to challenge banks' decisions after a landmark $300 million court case.

Under UK law, banks are obliged to suspend any transactions they consider suspicious and file a report to the Serious and Organised Crime Agency (SOCA) or other agency.

Failure to report a suspicious transaction is a criminal offence.

Jayesh Shah, a businessman who banked with HSBC in London, asked the bank in September 2006 to transfer $28 million to another of his accounts in Geneva.

The bank suspected Mr Shah of money laundering and blocked the transaction, filing a report to SOCA.

Ten days later, SOCA said that it was satisfied that the transaction was legitimate and informed HSBC, which then processed the transfer.

Mr Shah claims that the suspended transfer and money-laundering report triggered a sequence of events that ended in authorities in Zimbabwe freezing his assets there. He claims that he has lost more than $300 million as a direct result.

Mr Shah sued HSBC for compensation in the High Court, where a judge dismissed the claim saying that Mr Shah had no chance of success.

Today, the Court of Appeal overturned that decision, saying that Mr Shah had the right to pursue his case against HSBC and to try to prove that the bank’s actions were responsible for his loss.

Lawyers said that it was previously assumed that it would be extremely difficult for customers to challenge banks over this issue.

Although the burden of proof will now fall on Mr Shah to show that HSBC acted unreasonably, the bank will effectively have to justify its behaviour in court. HSBC will also be obliged to disclose its notes explaining why it suspected that Mr Shah was involved in criminal activity.

At a full trial. Mr Shah’s lawyers will be able to cross-examine HSBC compliance officers and other employees on why they treated Mr Shah the way they did.

Daniel Hudson, a specialist in financial crime and money laundering in the law firm Herbert Smith, said that this was the first time that the Court of Appeal has said that a customer is entitled to challenge a bank over its suspicions of money laundering by customers.

“The decision is clearly likely to encourage some disgruntled customers to bring claims, even where the prospects of success may be very remote and opens up the prospect of customers being able to gain access to internal banking documents and reports made to the authorities and to cross-examine bank employees,” Mr Hudson said.

Mr Hudson says that Mr Shah must now overcome two main obstacles before he can recover any money at trial.

First, HSBC must fail to show that it suspected Mr Shah of being involved in money laundering when it filed its suspicious activity report (SARs) to the authorities.

This may be difficult because money-laundering rules are strict and the threshold for a bank to be obliged to made a report is low and the suspicions do not have to be based on reasonable grounds.

Secondly, Mr Shah must then show that the suspended transactions and the money-laundering reports led directly to his loss.

Regardless of Mr Shah’s success or otherwise at trail, Mr Hudson said that banks will now have to be able to prove that they had genuinely had suspicions of money laundering where they make SARs.

He said: “Whilst in most cases it should not be difficult to do so, as the threshold for suspicion is low, and the customer will still have to prove their claims and make out a loss attributable to the bank's actions, it highlights the importance of internal anti-money-laundering procedures generating and retaining the evidence to justify a report to the authorities.”

Sarosh Zaiwalla, senior partner in Zaiwalla & Co, who acted for Mr Shah, said: “This is a landmark judgment, which, for the first time, makes the bank’s conduct in cases of suspected money laundering an appropriate matter to be tried by a court.”

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