What has happened?
On 8 July 2019, the English High Court handed down judgment in
proceedings between N and The Royal Bank of Scotland plc
("RBS") ([2019] EWHC 1770 (Comm)).
Following the conclusion of related proceedings brought by the
National Crime Agency ("NCA"), the court
was required to consider whether RBS had acted lawfully in freezing
accounts it held for N and terminating the banking relationship
without notice. The relevant contractual documentation
provided for RBS to close a customer's account without notice
only where it considered there to be "exceptional
circumstances", and allowed it to refuse to process any
payment if "in its reasonable opinion it is prudent to do
so in the interests of crime prevention". Such
terms, or similar, are standard in banker-customer contracts.
N, a money service business conducting large volumes of FX
transactions, held a number of accounts with RBS comprising four
main accounts, which had a turnover of £700 million, and
multiple client sub-accounts. As well as third party payments
to and from the accounts, there was constant activity between the
various accounts and, consequently, co-mingling of funds.
Following a number of red flags, RBS formed a suspicion that
a number of the accounts were being used to facilitate investment
fraud, particularly boiler rooms, and to launder the proceeds of
criminal conduct. Initially RBS froze seven of the
sub-accounts and sought consent from the NCA to return funds
in those accounts to N in accordance with its obligations under The
Proceeds of Crime Act. However, following an attempted
suspicious payment of £500,000 in October 2015 into a main
account, which was seen as an attempt to circumvent the freeze on
the sub-accounts, RBS considered this to be the "straw
that broke the camel's back" and, after
"careful consideration", took the decision to
freeze all of N's remaining accounts and terminate the banking
relationship without notice. This decision was taken on the
basis that the accounts were suspected of being used to receive and
launder the proceeds of crime.
N claimed that RBS was wrong in taking such a decision on the basis
that, among other reasons: (i) there was no suspicion of N being
complicit in money laundering; (ii) N was not suspected of any
involvement in the £500,000 suspicious payment; (iii) the
bank should have investigated the issue before taking any action;
and (iii) there were a number of other ways that RBS could have
dealt with the issue and avoided freezing N's accounts. N
brought proceedings against RBS for breach of contract and
negligence. (It should be noted that no financial loss was being
sought as N had established alternative banking
facilities).
In providing his judgment, Mr Justice Knowles CBE found in favour
of RBS holding that:
- RBS considered there were exceptional circumstances for closing the accounts without notice. This view was held in good faith, was rational, and the circumstances fully justified the steps taken.
- RBS held the opinion that a refusal to process payments was prudent in the interests of crime prevention. This opinion was reasonable and reached after consideration of the material circumstances.
- RBS' approach was proportionate and took account of the adverse impact any freeze would have on N's business.
The judge added that N simply had to be better prepared to guard
against money laundering than it was. It emerged in evidence
at trial that N had serious failures in respect of its due
diligence and regulatory compliance at the relevant time, with its
systems and controls having been considered inadequate.
What does this mean?
This judgment, although specific to the facts of this particular
case, nevertheless provides banks with reassurance that
contractual terms allowing for the termination of a banking
relationship without notice in exceptional circumstances, and the
refusal to process payments in the reasonable belief that this
is in the interests of crime prevention, can encompass the
situation where a bank holds an honest, rational and reasonable
suspicion of money laundering.
It also emphasises the significance of adequate systems and
controls being in place, particularly in the sphere of money
service businesses. The court acknowledged that such
businesses are vulnerable to illegitimate use, especially in the
form of investment and boiler room fraud. More robust
controls by N would likely have reduced the risk of its accounts
being used to receive the proceeds of crime.
While the judge "fully appreciate[d] that the Bank's
decision had major consequences for N", he continued
"the Bank's decision was itself a proper response to
circumstances for which N, not the Bank, must take
responsibility" and that "the interests and
reputation of N and of the Bank are only part of the picture. The
wider, public, interests of the prevention of crime and the
protection of the victims of crime are a further crucial part of
the picture".
Next steps
Banks should consider the contractual arrangements in place with their customers, and the basis upon which they may be entitled to refuse to process payments and/or terminate a banking relationship without notice. Decisions to freeze funds or terminate relationships should be fully documented and based on reasonable grounds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.