In N v Royal Bank of Scotland, the English High Court held that a bank was not in breach of contract for closing a customer's account without notice in circumstances where there was a suspicion of money laundering. The bank had acted in accordance with express contractual provisions which allowed it to terminate the banking relationship without notice "in exceptional circumstances".
N was an authorised payment institution providing foreign exchange and payment services to its customers. Royal Bank of Scotland (the Bank) suspected that some of N's clients were engaged in money laundering and using N's accounts to hold the proceeds of crime. The Bank also found evidence of commingling between N's main accounts and its client sub-accounts. The Bank responded by freezing a number of the client sub-accounts. However, after the sub-accounts had been frozen, one of N's clients attempted to make a payment from the main account. This aroused the Bank's suspicions that N's clients were trying to circumvent the freeze on the sub-accounts. The Bank responded by freezing the main accounts and terminating its relationship with N immediately.
N commenced proceedings alleging breach of contract. The main thrust of N's argument was that the Bank had failed to adopt a proportionate response to any money laundering risk identified. N further argued that there was no evidence of its complicity in the money laundering, that other options were open to the Bank (e.g. ring-fencing the relevant accounts) and that the Bank had failed to take into account the adverse impact on N's business of freezing accounts and then terminating the relationship.
Mr Justice Knowles concluded that the circumstances fully justified the steps taken by the Bank. While the Bank's decision had "major consequences" for N, it was "a proper response to circumstances for which N, not the Bank, must take responsibility". The Judge also held that the Bank's approach was proportionate and took account of the adverse impact on N's business.
Specifically addressing N's arguments, the Judge concluded the following:
- Other options such as ring-fencing had already been tried when the suspect sub-accounts were frozen. However, evidence of commingling meant that the main accounts were also compromised and this undermined confidence that ring-fencing would be sufficient.
- The Bank's opinion that it was prudent to refuse to process payments was reasonable. It was reached after consideration of the material circumstances, was legally correct and based on a sound understanding of the relevant legal principles.
- Contrary to N's claim, the Bank had considered the impact that its decision would have on N's business. The impact on the public interest in crime prevention also"has to be part of the consideration".
- The contract provided for a right to close an account without notice where "the Bank considers there are exceptional circumstances". There were no grounds for alternative interpretation or for reading limiting language into this clause, such as N had suggested.
- Different decisions could have been taken by the Bank "honestly, rationally and reasonably", but this did not mean that the decision reached fell outside the range of decisions open to the Bank. "It was an honest, rational and reasonable decision."
This is not the first occasion where the English courts have stepped in to support this type of response by a financial institution faced with similar circumstances. In 2012, the English High Court in Shah v HSBC rejected a claim that the Bank was in breach of contract by refusing to process payment instructions pending the result of a Suspicious Activity Report (SAR). In contrast to the position of the Bank in this case, in Shah there was no express term in the customer's contract with the Bank to allow the Bank to refuse to act where it had suspicion of money laundering.
Implications of the ruling for Irish financial institutions
While specific to the facts of the case, this judgment provides some reassurance that contractual provisions – even those drafted broadly – allowing for the termination of client accounts in exceptional circumstances may be relied upon where there is a suspicion of money laundering. It also highlights the importance of documenting procedures when a decision to freeze funds or terminate a relationship is being considered and of ensuring that there are reasonable grounds for any decision taken.
The Irish courts have not yet been called upon to rule on these points, but the case provides a useful precedent for Irish financial institutions. It should prompt banks to review contractual arrangements with customers and ensure that their contracts contain provisions allowing them to take necessary action, up to and including freezing of the accounts and termination of the relationship without notice, in the event of a suspicion of money laundering.