In July 2019 the High Court found in favour of Royal Bank of Scotland in N v RBS, which was brought by a former customer seeking damages flowing from what it said were unlawful actions taken by RBS. RBS had frozen numerous accounts held by the customer and terminated the banking relationship with immediate effect on the basis that it suspected some of the customer’s accounts contained the proceeds of crime.
The court found that RBS was entitled to terminate its relationship with its customer without notice.
This decision was made on the basis that RBS had investigated the customer’s use of accounts, assessed the risks (both in terms of fraud and the risks to the customer’s business) and considered whether exceptional circumstances had arisen which would entitle RBS to terminate banking facilities in accordance with its terms and conditions. The court considered the alternative avenues which the customer suggested RBS could have pursued and concluded that the levels of risk and concern within RBS were too high for it to be reasonable to have required RBS to (for example) ringfence the suspect funds or seek consent from the National Crime Agency (NCA) on a daily basis.
The effect of RBS’s decision was that its customer was denied banking facilities.
This is in contrast to the position in which Deutsche Bank found itself as a result of operating various accounts on behalf of Jeffrey Epstein. In July this year Deutsche Bank was fined $150m for failing to properly monitor its relationship with Epstein.
Money laundering obligations
Banks are under particular obligations to prevent money laundering. These have intensified over time, following trends in the US, with the introduction of successive money laundering directives (MLDs) from the EU. MLD 4 put a heavy emphasis on the importance of a risk-based approach, while the most recent, MLD 5, introduced further requirements in relation to the anti-money laundering (AML) obligations of banks, notably in relation to politically exposed persons (PEPs), high-risk third countries and beneficial ownership.
In light of the increasingly stringent regime, and the willingness on the part of regulators to impose very significant fines (such as the New York Department of Financial Services in relation to Epstein’s relationship with Deutsche Bank), it is no surprise that banks are becoming risk-averse in the extreme.
There are, however, problems that arise when a risk-based approach leans too far towards the absolute avoidance of risk, as against a proper assessment, consideration and weighing of the issues involved.
Improperly motivated criminal litigation
In parallel with the strict regime imposed by regulators globally, there has also been a rise in criminal litigation motivated by improper purposes, whether for political reasons or in the context of hostile commercial litigation. The global criminal justice watchdog Fair Trials discussed the abuse of Interpol red notices in its 2018 report Dismantling the Tools of Oppression: Ending the Misuse of Interpol. Governments and individuals with an agenda to push can see to it that criminal proceedings are instituted, bringing with them the possibility of issuing a red notice through Interpol. In a number of Gulf states criminal proceedings may be commenced in relation to offences such as unlawful disclosure of information or bouncing a cheque. In a number of countries a criminal allegation made against a person outside the country can lead to a conviction in th eir absence. Governments seeking to silence opposition politicians overseas need only institute proceedings against an individual on a fabricated criminal charge. Once a red notice is published on Interpol’s website, this is accessible to all, including the compliance departments of banks and organisations employed to identify and manage risk.
The consequences of banks’ compliance departments taking a zero-risk approach alongside the growing misuse of criminal proceedings by parties with an improper motivation are that individuals subject to these acts are increasingly denied banking facilities. The N v RBS decision serves to entrench this attitude by the banks – in reality, they have more to lose by carrying out a properly considered and nuanced risk assessment than by terminating a relationship with a customer whose profile raises any red flags.
Problems of not having a bank account
Being denied banking facilities has always been inconvenient, but in recent years the impact of a termination of a banking relationship or refusal to provide banking facilities has widened.
As we spend more time online, the need to have a bank account to book tickets, pay for subscriptions, receive wages and shop becomes more evident. This has been accentuated during the pandemic as numerous shops stopped accepting cash and people increasingly turned to online shopping.
Further, certain industries restrict use of cash payments – law firms for example – so without a bank account it would be particularly difficult to instruct a solicitor.
Without a bank account it is increasingly difficult to participate in society. Further, lack of banking facilities very effectively restricts or closes off a person’s ability to either bring a legal challenge against a bank, or to defend against an improperly motivated criminal charge.
Right to banking?
To ensure people are not excluded from society or denied access to justice because of decisions taken by banks which are not easily appealable, transparent or subject to external scrutiny, should there be a right to banking? This would mean that a bank cannot terminate a customer’s banking facilities unless that customer is able to open facilities elsewhere.
We are, of course, not advocating for reduced AML checks – banks are at the forefront of the fight against financial crime and money laundering. However, and as suggested in N v RBS, there are steps which a bank could put in place in circumstances in which it has concerns about the use of accounts which would allow it to undertake the necessary checks, including referrals to the NCA where necessary, but would stop short of terminating facilities: ringfencing suspect funds, manually operating the account and/or seeking regular consent for use of the facilities.
Banks should also be more willing to engage with customers to explore and address AML concerns: discussing and investigating the source of funds to ensure they do not originate from a country subject to sanctions; and looking behind and engaging with litigation which may be political in nature, particularly in circumstances in which a freeze of accounts and/or the termination of facilities could have a significant impact on the customer’s ability to instruct lawyers and defend the proceedings.
Mary Young is a partner in dispute resolution at Kingsley Napley and LSLA committee member. Rebecca Niblock is a partner in criminal litigation at Kingsley Napley