As AML/CFT compliance burdens and regulatory expectations are constantly increasing, the banking sector, including local players, has embarked on a widespread de-risking exercise in an effort to mitigate the risk of non-compliance as well as shed customers which may be associated with higher ML/FT risks. Against this backdrop, the recent case of N vs The Royal Bank of Scotland decided by the High Court in the UK is an interesting development.
By way of background, the claimant (“N”) was an authorised payment institution providing foreign exchange and payment services to its customers and banked with The Royal Bank of Scotland (the “Bank”), with the main accounts including a pooled client account. In October 2015, the Bank froze accounts held with it by N and terminated the banking relationship. In response, N commenced court proceedings challenging the lawfulness of that action arguing that the terms governing the contractual relationship between N and the Bank provided that the Bank ought to have given at least 60 days’ written notice to close an account. It ought to be highlighted here that the terms further provided that the Bank would not be obliged to give such written notice “in exceptional circumstances”.
The Bank’s reason for terminating the relationship with N was that the Bank suspected that the credit balances on the pooled account constituted benefit from criminal conduct or represented such benefit as part of boiler room fraud and, more broadly, that it suspected that N was engaged in money laundering. Consequently, the Bank also filed the relevant notifications with the National Crime Agency. In general, the Bank considered that these events constituted an “exceptional circumstance” and therefore the Bank was not required to give written notice.
The High Court accepted that the circumstances were indeed exceptional and that the contractual terms did provide the Bank with the discretion to close the accounts, without having to establish or prove the crime. It is important to note that the High Court’s conclusion is anchored on the following factors:
- the Bank was able to prove to the High Court that it exercised its discretion in a reasonable manner and that the internal discussions held amongst the MLRO and other senior members of management met a standard of objective reasonableness;
- the Bank had considered all the material circumstances and the legal framework governing its relationship with N as well as its AML/CFT obligations at law; and
- the approach taken by the Bank was tailored and proportionate taking account of the adverse impact that any freeze would have on N’s business.
Whilst acknowledging that the terms of each bank may differ and that each bank must therefore have due regard to its own contractual agreement and the precise terms contained therein, this judgement ought to be welcomed amongst the banking community as it confirms that banks can use discretion to take drastic action where necessary. This does not however mean that banks have free reign to de-risk and close accounts at will without due consideration of their contractual obligations; indeed, such discretion should be used reasonably and proportionately, whilst adequately demonstrating (and documenting) that all material facts and consequences have been considered thoroughly by the MLRO and senior management as appropriate. In other words, the bank must show that: (i) it had no other option but to freeze and terminate the relationship in the public interest and in the interest of the prevention of financial crime; (ii) advance notification could have tipped off the customer; (iii) all circumstances, facts and consequences were considered in arriving at the decision to terminate.