Bank terminates customer relationship without notice for “exceptional circumstances” on suspicion of financial crime and money laundering

The claimant (N) was an authorised payment institution which carried out a “Money Service Business” of providing foreign exchange and payment services to its clients. From January 2013, N banked with the defendant, The Royal Bank of Scotland (RBS or the Bank).

N held two types of accounts with the Bank: (i) four main accounts (the Main Accounts); and (ii) several underlying client sub-accounts (the Sub Accounts). The transactions on the Main Accounts primarily involved payments into and out of the Sub Accounts.

One of the key terms governing the relationship between the Bank and N was Clause 9.4 of RBS’ “Bank Account Terms”, which provided:

“The Bank will give the Customer not less than 60 days’ written notice to close an account, 'unless the Bank considers there are exceptional circumstances' (emphasis added)"

Suspicion of financial crime and money laundering

In September 2015, RBS froze seven of the Sub Accounts associated with certain clients of N suspected of investment fraud (the Suspect Sub Accounts). By October, RBS had become aware that N was banking nine separate “boiler room” businesses. These are businesses which fraudulently sell fake investment products. N accepted that, based on the information known to N and the Bank, the Suspect Sub Accounts should remain frozen.

In October 2015, the Bank identified that, prior to the freezing of the Suspect Sub Accounts, there had been money flows between the Suspect Sub Accounts and the Main Accounts. This made it difficult for the Bank to separate, in the Main Accounts, potential proceeds of crime from legitimate funds.

Later in October, there was an attempted payment of GBP500,000 into one of the Main Accounts (Attempted Payment). RBS suspected the Attempted Payment was an effort to use that Main Account to circumvent the freezes on the Suspect Sub Accounts. It was the “straw that broke the camel’s back”. This led the Bank to suspect that the Main Accounts contained at least some proceeds of crime and that N was engaged in money laundering. RBS froze the Main Accounts and terminated its relationship with N immediately, on the basis that there were “exceptional circumstances” justifying this action.

N sues the Bank

N sued RBS for breach of contract and negligence. N argued that RBS had been wrong to terminate the relationship without notice because the circumstances were not “exceptional”. In particular, N argued that: (i) there was no suspicion of complicity by N in money laundering; (ii) the Bank failed to investigate the commingling issue and ascertain the extent of it; and (iii) there were at least six ways the Bank could have mitigated its financial crime and money laundering risk without freezing the Main Accounts and terminating its relationship with N.

N also argued that RBS was required (and failed) to exercise its discretion under clause 9.4 of the Bank Account Terms: (i) reasonably; (ii) after consideration of the material circumstances; (iii) in a way which would be legally correct and based on a sound understanding of the relevant legal principles; and (iv) in a way which was proportionate taking into account any impact on N’s business.

Were the circumstances “exceptional”?

RBS relied on the following factors to form a view that there were “exceptional circumstances” justifying immediate termination:

• If N’s clients had attempted to transfer suspect funds directly into the Main Accounts (ie the Attempted Payment) then it was reasonable to conclude they may have done so previously and would continue to attempt to do so going forward. This meant that the Main Accounts could no longer be adequately ring-fenced by freezing the Suspect Sub Accounts. RBS could therefore no longer continue operating the Main Accounts without placing the Bank at risk of committing money laundering and facilitating financial crime.

• The relevant events had created an exceptional level of concern at the Bank about both N and its clients. This meant that, in RBS’ view, the relationship between N and the Bank had broken down and that the relationship would need to be terminated. The other two mechanisms available to the Bank to terminate the relationship (ie other than immediate termination for “exceptional circumstances”) were not tenable. These were:

• Termination with standard notice (unfreezing the accounts): this option would have required the Bank to operate N’s accounts during the notice period. This would mean that the Bank would have had to seek consent from the National Crime Agency for every single suspicious transaction on the accounts. This would have been practically unworkable and an abuse of the Suspicious Activity Report regime.

• Termination with standard notice (keeping the accounts frozen): this option would have exposed the Bank to an unacceptable level of litigation risk from both N and its underlying clients.

The court agreed that the above factors were sufficiently exceptional as to warrant immediate termination of the Bank’s relationship with N. It was therefore not necessary for the court to decide whether N’s position on the proper application of clause 9.4 was correct.

Comment

Although this case was decided on its facts, it is a useful precedent for banks seeking to establish that suspicion of financial crime and money laundering can create “exceptional circumstances” warranting the immediate termination of a customer relationship (where the contractual arrangements permit such action to be taken).

The following actions will be helpful in establishing that exceptional circumstances exist:

• taking appropriate legal and forensic accounting advice before arriving at the decision;

• documenting the decision and the process undertaken to arrive at that decision; and

• assessing (and documenting) why less extreme alternatives to the decision are either not possible or practical.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.