Banks as government intelligence agencies’ secret associate


In the middle of May 2012 the High Court in London, marking the end of a 4,5 year legal battle, issued a decision dismissing in its entirety a claim of the Shah family (Jayesh Shah, Shaleetha Mahabeer) – conducting business w Zimbabwe – for damages against HSBC Private Bank (UK) Limited for failing to effect four of Shah’s financial transactions. The reason for failure to execute the client’s instructions was a suspicion – invalid, as it later turned out, – that the transactions constituted money laundering procedures.

According to the Shah family, as a result it had suffered losses amounting to over £300 million. The case caused quite a reaction, yet only within the banking and financial circles. It did not echo widely among the public. And that is a shame, because consequences of the dispute and decision are far reaching and long lasting and they by far outreach the Zimbabwean millionaire’s subjective resentment.

For us this case provides an opportunity for an afterthought about the more and more omnipotent state, which not only is not dying – what was foretold by globalization theoreticians – but it grows strong controlling all and any areas of the socio-economic life and which has in recent years violently infringed the sphere of the private financial sector and its citizens’ money.

With persuasion, force and blackmail, it has acquired the cooperation of banks usually so boasting about their independence.

This analysis shall be commenced by quoting the basic facts. During the period between September 2006 and February 2007, HSBC failed to execute its client’s – a Zimbabwean businessman Shaleeta Mahabeer Shah’s – instructions and froze four of his transactions amounting to a total sum of £38 million. The bank, suspecting that it was faced with money laundering procedures, made a Suspicious Activity Report (SAR) stipulated by law to a statutory authority of the British revenue intelligence called SOCA (Serious Organised Crime Agency).

At the same time, HSBC refused to provide its client with any information on why the transactions had been frozen, explaining that it was ‘complying with its UK statutory obligations’. After a while, SOCA informed Mr Shah’s solicitors that Mr Shah had not been under criminal investigation and gave permission for a transfer of money to be effected as fully legal.

However, according to Shah, by reason of the bank’s failure to timely execute his instructions, he had his assets in Zimbabwe seized and in consequence suffered significant financial and reputational losses. Following that the Shah family served a claim against HSBC alleging that as a result of the bank’s actions it had lost the equivalent of $331 million in loss of interest.

The claim was dismissed by the court of first instance in January 2009, however an appeal enabled Shah to continue the suit. In its final decision, the High Court concluded that Shah ‘was able to, but did not, take reasonable steps to mitigate or avoid his loss’. In addition, Shah was obliged to cover 40% of the legal costs borne by HSBC, which were estimated to amount to around £2 million. Apart from that, Shah’s own legal costs were estimated to be in the region of £1.2 million.


Banks victory of the financial sector, human rights’ failure


The court’s decision was a great relief to HSBC, which had been having a difficult time being criticized for inefficient anti money laundering procedures and which was accused of ‘allowing billions in Mexican drug cartel cash to be laundered; offering banking services to institutions which helped fund al Qaeda and circumventing sanctions imposed on Iran’ by the American senate in 2012.

The judgment, according to Reuters’ analysis, was also a relief to financial firm professionals who feared the impact of a Shah victory on their processes for suspicious activity reporting. The UK banking sector is an author of majority of the 250,000 SARs submitted each year to SOCA. Just for comparison purposes, according to the Polish General Inspector of Financial Information (GIIF), in 2012 2427 SAR-equivalents were recorded in its system.

Shah’s victory – in the bankers’ view – would have disastrous consequences for the financial sector. It would spark a general review of procedures and the way banks handle and report activities suspected of money laundering. Many observers admit that the court’s decision favours the financial industry.

If financial firms’ employees were to justify their decisions in courts it would dramatically lift the bar of analytical and investigative requirements. Hence the judgment legitimizes status quo so the banks do not need to work hard to submit a report on money laundering suspicion.

At the moment submitting a SAR is not linked to any actual responsibility of the person doing it. If that person was to consider the costs of his or her mistake, it would have a deterrent effect. It would also be related to massive legal costs and revolutionary changes would have to be introduced in banking law. Summing up, the dispute did not do credit to HSBC but the decision was generally welcomed with relief.

Analysing the problem from Shah family’s point of view, the judgment is another step back in terms of human rights. An innocent client – as it turned out – is denied execution of the terms of his agreement and the right to information on reasons of such decision. A situation like this not only destroys relations between banks and their clients but also results in a likelihood of losses on the client’s side. Who should bear responsibility for these losses: the client or a bank? The court thinks that the client and all this in the name of a higher goal which, while it has not been defined by the court, kind of ‘blackmailed’ the courtroom: fight against terrorism.


‘Flexible’ interpretations of the High Court


Courts’ judgments should not be questioned yet it is hard not to be under the impression that the courts lacked courage. Other decision would mean a war against the state, against financial circles, against accusations and suspicions of fostering terrorism and money laundering. A decision in favour of the Shah family could be interpreted in a manner which implies that the judiciary is to be at war with the political and financial establishment. And it is hard to fight something of which you constitute an essential part.

The majority of observers stressed that there is nothing surprising about the court’s decision. In the face of the court’s ‘interpretation equilibristics’ there is definitely no surprise. Formally everything was in order. In accordance with the spirit of modern legislation, any doubts were interpreted to the benefit of the defendant – the HSBC Bank. Yet a detail was overlooked: the parties in the courtroom were not equal. It was a dispute between a man whose rights had been infringed in the light of powerful financial circles, not only British ones.

And still the court presented a soft, blurred definition of suspicion of money laundering. Namely, it concluded that the person responsible for assessments (the bank’s employee) must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice, but the court does not require the suspicion to be firmly grounded and targeted on specific facts or based on ‘reasonable grounds’. Further the judge states: ‘The existence of suspicion is a subjective fact. There is no legal requirement that there should be reasonable grounds for the suspicion. The relevant bank employee either suspects or he does not. If he does suspect he must (either himself or through the bank’s nominated officer) inform the authorities’. And although the judge admitted that in this case there was a low threshold of suspicion, apparently it did not release the bank employee from an obligation to take actions. In other words, so what if an unclear suspicion is just a subjective feeling of the bank’s employee – you should still act on it, in this case by freezing transactions and accounts.

Further the High Court goes hand in hand with HSBC asserting that: ‘The likelihood of prejudice to an investigation has to be judged by reference to the facts available to a bank at the time of the request. The banks will not necessarily know whether an SAR has led to an investigation and, even when they do, they will be unlikely to know the scope of that investigation’.

The fact that a typical practice around reporting SARs in HSBC amounted to a three stage process, in which at least three separate employees were involved, was interpreted by the court exclusively for the benefit of the bank. Although it might be treated completely differently: three employees, independent in their assessments of the material, made groundless accusations. Does it prove HSBC’s strength or weakness?

In the whole case a most significant problem fades away – public sector ethics and responsibility. Someone with decision making power in terms of vested interests of another person must take responsibility for his or her own decisions. No such responsibility is evidenced here – in this case, the officer’s wrong decisions are concealed by the courts, and essentially by the state.


What does the dispute Shah vs. HSBC teach us?


Above all, it teaches us that most forecasts of political scientists, economists and any other pitiful experts on globalization are worth less than the paper which carries them. A leading prophesy, put forward already 20 years ago, was a thesis that we are dealing with an end of nation states, which will not fall but will systematically give up on their traditional functions. State’s deregulation was predicted – limitation to its regulatory and supervisory functions. Global market mechanisms were to replace state’s internal (economic) functions. Whereas now, Anno Domini 2013, you wish you could ask these specialists: where is that backed off state?

We currently observe an exactly opposite phenomenon: we see the state in a sudden offensive, developing its regulatory and supervisory functions, placing its citizens under surveillance not known so far, infringing human rights in the name of humans’ safety and security, throwing around threats of terrorism as a blackmail.

In this context the case Shah vs. HSBC has a wider scope which should be highlighted. The state – or liaised states – breaks the banks’ necks by intruding on their procedures, forcing them to disclose bank secrecy, demanding confidential data of their customers. We already wrote about this several times when analysing the American FATCA legislation. The banks, remaining in conflict with a weaker party, are lenient towards it even at the expense of their reputation. In return the state offers them a so called ‘blissful peace’ and continuing existence. Putting it otherwise, the banks become secret associates of the state, justifying their own involvement with patriotic motives. A classic stifling of the feeling of remorse.

On one hand, the banks get involved in the government control and surveillance system in relation to citizens; on the other hand they gain specific privileges in return. An obligation to conduct financial operations through a bank account which was introduced in Poland (art. 22 of the freedom of economic activity act) combined with the duty to report transactions to GIIF which was imposed on banks is a good example.

Anti-money laundering provisions impose obligations on banks which turn them into an extension of prosecutors’ offices whereas at the same time the state protects banks from liability for infringing their agreements with customers if they go too far in their prosecution-like inclinations. Shah’s case is a perfect example thereof, where to the best of our knowledge no crime was committed, the client suffered great losses, disproportionate to the amount frozen and the bank was not found liable. Moreover, the court treated in a very understanding way the fact that the bank concealed from the client all and any information on the reasons which led the bank to freeze his funds and on the officials who made such decision. The situation starts to resemble Kafka’s ‘Trial’:

‘You will have to answer them,’ said K. ‘Here are my identification papers, now show me yours and I certainly want to see the arrest warrant.’

‘Oh, my God!’ said the policeman. ‘In a position like yours, and you think you can start giving orders, do you? It won’t do you any good to get us on the wrong side, even if you think it will – we’re probably more on your side that anyone else you know!’

Banks’ actions, in the face of such verdict, may become impudent to such an extent, that the banks will use SAR reports ‘just in case’ knowing that if a court trial comes, the justice system will be on their side.

Today’s world continues in exactly such direction: regulation and control. Larry Kahaner announced that we have entered an era of surveillance. We have deluded ourselves that it is all about business intelligence but it turns out that we have opened an era of complete surveillance. In front of our very eyes, liberal pipe-dreams of human freedom as the highest value fall. Today – as asserted by state representatives – security is most important. The citizen has a choice: either to be free, but live in threat or to remain subordinate but safe. It turns out that citizens ‘buy it’ – they buy that fake choice. Studies of the American society after the Snowden affair blew wide open confirm it. The majority prefers to be under surveillance in exchange for safety. Yet they do not understand that this is a delusive feeling of safety – a captive will not be safe anywhere. The Poles know something about it.


Alternative banking opportunities as a remedy for surveillance?


What is there to do for a client who is not willing to be an open collaborator of a secret associate, ie. a bank? The answer to that is provided by life itself and human invention. Alternative, non-banking money transfer systems pop up like mushrooms.

As stated in GIIF’s report, in 2012 a new field used in money laundering procedures was observed in Poland – trade in Bitcoins (BTC), a virtual currency. This digital currency was created in 2009 by Satoshi Nakamoto. The project to generate Bitcoins came into being at the beginning of the current financial crisis and the subsequent turbulences get it new supporters. People stop trusting traditional banks and seek better means to keep their assets. Although Bitcoin is just a virtual string, there are more and more people in the world who view it as future currency, free from shortcomings of traditional currencies („Pieniądz w pliku. Bitcoin – waluta internetowa na kryzys” – ‘Money in a file. Bitcoin – online currency for the crisis’; Polityka of April 9th, 2013). Bitcoins are accepted as payment for online services as well as for actual goods. According to GIIF the number of persons using Bitcoins, as well as a group of companies accepting payments in this currency such as online stores offering purchases over the Internet, increases.

Unfortunately GIIF recommends that this area – due to substantial anonymity within it – be ‘subject to intensive operations of institutions counteracting financial crime’, alleging that it is being used by criminal groups engaged in money laundering and that there were securities worth around $300 million held on Bitcoins virtual accounts linked to online gambling area.

The state’s coercive apparatus is very focused in its wide interest in any possible attempts of replacing banks with alternative trade systems for a very simple reason: these are not state’s products and as such they remain ‘suspicious’. No government or central bank is behind Bitcoin. This currency is anonymous and cannot be controlled. It is therefore a sufficient reason to get rid of the system, citing terrorism and gangsters as a threat. Having read the last annual report on the activity of GIIF leads to a conclusion that the attention given to Bitcoin is much disproportional to the actual size of this phenomenon.

On the other hand the coercive apparatus of the state is actively involved in defending banks, which can be evidenced by the recent charges brought against Arthtur Budovsky, the creator of an alternative payment system called Liberty Reserve. The people interested in the topic claim that the Liberty Reserve website has been used by the criminal world. This is because the system allowed for fast global money transfers in popular currencies (EUR, USD, RUB), subject to just basic necessary data, which allegedly was neither verified nor stored for a longer period of time. Taking account of the construction of charges you may be under the impression that the system was used by criminals – but criminals also use things like hammers and no one charges hammers’ producers with complicity in burglaries.

We do not want to act as bad prophets but it does seem that the future of any non-bank money transfers has already been declared at their birth – they will be erased. The states will again prove their loyalty towards banks, their secret associates. We wish we were wrong but this seems to be the logic of development of the more and more controlled financial sector.




Every day, intelligence agencies of the Western democracies collect billions of bytes of information on their citizens, using most advanced technologies to collect and analyse the data and reach conclusions. The banks and the information transferred by them constitute a very important element of this system of total surveillance. A massive – unprecedented in the history – tool is created, which is supposed to serve citizens’ protection, but which really does not evaluate the ‘good’ or ‘wrong’ and may therefore be used for controlling the society by anybody with any chosen aim.

Legislation and rulemaking of laws which are supposed to console us and reassure that such tool will be appropriately used only creates a fake and poor substitute for safety, since legal acts are known for being amended and infringed and simply thrown away in critical situations, when one legal order is replaced with a new one. Yet, in contrast to legislative acts, such tool will not land on a scrap heap. It gets more powerful and dangerous with every piece of newly acquired information and it will serve any authority, no matter what kind of goals guide it.



Robert Nogacki, Attorney-at-law – Skarbiec Law Firm (Kancelaria Prawna Skarbiec)

Marek Ciecierski, PhD – Skarbiec Professional Business Intelligence (Profesjonalny Wywiad Gospodarczy Skarbiec Sp. z o.o)