Law firms could find themselves being sued for reporting suspected money laundering following a Court of Appeal decision last week.

Law firms, banks and other businesses handling client money are obliged to file Suspicious Activity Reports (SARs) to the Serious and Organised Crime Agency (SOCA) where they suspect a client of money laundering.

Last week the Court of Appeal ruled that client Jayesh Shah had the right to test in court HSBC Private Bank’s claim that, complying with obligations under the Prevention of Crime Act (POCA) 2002, it had grounds to submit a SAR alerting SOCA to its suspicions of money laundering.

Shah has claimed that delays arising from the bank’s report to SOCA led directly to $300m (£192m) being seized from his Zimbabwe bank account by the Zimbabwe authorities.

HSBC, which has the same obligations under POCA as law firms, will now be required to prove in court that its suspicions were held in good faith, while Shah’s lawyers will be allowed to examine witnesses and to sue for damages.

Delivering the judgment, Lord Justice Longmore said: ‘The normal procedures of court are not to be sidestepped merely because parliament has enacted stringent measures to inhibit the notorious evil of money laundering.’

Sarosh Zaiwalla, senior partner of London firm Zaiwalla & Co, who acted for Shah, said that before this ‘landmark judgment’, banks and law firms ‘could act on a hunch about a client’s transactions without disclosing the necessary information’. A client could now insist on a ‘full trial with proper disclosure’ to test whether the report of suspected money launderinghad a ‘factual basis’ and was made in ‘good faith’.

Sue Mawdsley, a partner at Liverpool law firm Legal Risk, said solicitors should be ‘uneasy’ about the Court of Appeal’s ­ruling. ‘How do you definitively prove reasonable grounds for your suspicions when they may be based not on solid proof, but on years of experience? And then there is the issue of privilege, of what can and cannot be divulged in proving grounds or defending a claim.’

Omar Qureshi, a partner in the dispute resolution group at City firm CMS Cameron McKenna, said: ‘It is no longer sufficient to assert you have a suspicion, you must demonstrate it. Law firms are advised to look at their anti-money laundering processes and training to avoid the potential for loss.’