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") ( 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".
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.