On 8 July 2019 the High Court handed down a judgment in the N v. The Royal Bank of Scotland plc case. The case considered the Bank's decisions to terminate the banking relationship with N without notice on the basis that it suspected that some of N's accounts contained the proceeds of crime.
The background of the case can be summarised as follows:
- N is a money service business offering FX and other payment services to its customers. N held a number of accounts with the Bank, including four main business accounts and a number of dedicated customer accounts.
- Following an investigation, the Bank formed a suspicion that several of N's customers were perpetrating boiler room scams on vulnerable individuals. The Bank further suspected that credit balances in N's main accounts and some of its dedicated customer accounts constituted the proceeds of these crimes.
- Upon forming this suspicion, the Bank froze certain of N's accounts and made a number of suspicious activity reports to the National Crime Agency (NCA) seeking consent to return funds to N and to exit the relationship. Subsequently, the Bank decided to terminate the banking relationship without notice.
- N issued proceedings for an interim mandatory injunction requiring the Bank to operate N's accounts and for declaratory relief.
- On hearing the application, Mr Justice Burton gave a series of orders requiring the Bank to make a number of specified payments. In order to protect the Bank, the court gave an interim declaration that the Bank would not commit a criminal offence by making those payments.
- On appeal, whilst not going so far as to say that POCA ousts the jurisdiction of the court to grant interim relief, the Court of Appeal held that the statutory procedure is highly relevant to the exercise of the court's discretion to grant such relief. POCA, which represents a "workable" and "reasonable" balance of conflicting interests in the fights against money laundering, cannot be displaced merely on consideration of the balance of convenience as between the interests of the private parties. Cases justifying such intervention are likely to be exceptional.
The main action
In the main action N sought damages flowing from the Bank's decision to terminate the banking relationship without notice, claiming breach of contract and breach of the Bank's tortious duty of care.
The Bank's defence was that, under the terms of its banking contract with N, it was entitled to terminate the banking relationship without notice where there existed exceptional circumstances. It was the Bank's position that the operation by N of a number of dedicated accounts for customers suspected of being engaged in investment fraud, and the resulting suspicion that its accounts held the proceeds of crime, constituted exceptional circumstances.
The court heard witnesses for N, including N's Money Laundering Reporting Officer at the relevant time. The court also heard witnesses for the Bank, including several members of the team, who had carried out the investigation into N and its customers.
The court comprehensively rejected all the claims brought against the Bank.
The key factual findings were:
- the Bank considered that there were exceptional circumstances for closing the accounts;
- the Bank's view was rational and held in good faith;
- if the Bank was required to meet the standard of objective reasonableness, it met that standard;
- the Bank's discretion was exercised in a reasonable manner and the circumstances fully justified the steps decided on by the Bank;
- the Bank's opinion that a refusal to process payments was prudent in the interests of crime prevention was reasonable and reached after consideration of the material circumstances;
- the Bank's opinion was legally correct and based on a sound understanding of the relevant legal principles; and
- the Bank adopted a proportionate approach taking account of the adverse impact that freezing the accounts would have on N's business.
N put forward a number of possible ways which, it was suggested, the Bank could have adopted and which might have obviated the need to close N's accounts, including ring-fencing suspected proceeds of crime, manually reviewing transactions on the account and breaking the account. Each was rejected by the judge.
The effect of the decision
The decision does not alter the principles established in previous cases. It does, however, provide some insight and guidance on how Banks respond to suspected money laundering.
- Most banking contracts will include a clause allowing the bank to immediately terminate the banking relationship in exceptional circumstances. The judgment suggests that developing a suspicion that a customer is knowingly or unknowingly dealing with the proceeds of crime is likely to be deemed an exceptional circumstance.
- Although each case will turn on its own facts, it seems a Bank will not necessarily be required to seek alternative ways of mitigating money laundering risk, such as ring-fencing suspected criminal funds.
- The court heard evidence on the nature of the investigation undertaken by the Bank into N and its customers and the judge determined that the Bank's actions were reasonable and fully justified.
The judgment also serves as a reminder that money services businesses are expected to undertake adequate on-boarding and KYC procedures in order to ensure that they manage money laundering risk. Failure to do so will not only expose businesses to regulatory and criminal sanction but could also jeopardise banking relationships.
Dentons acted in behalf of the Bank in this matter.