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EU General Court confirms ECB’s decision to withdraw the authorisation of Estonia’s Versobank

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Behrens Alexander
Dr Alexander Behrens

Partner

Frankfurt am Main

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Lisa Huber

Regulatory Practice Prof.

Frankfurt am Main

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16 May 2022

In Joined Cases T‑351/18 and T‑584/18 Versobank the court decided that the ECB was competent to withdraw a banking licence for severe breaches of AML/CFT requirements and clarified the interplay between the bank resolution regime and licence withdrawal. 

Facts of the Versobank decision

Versobank was a small Estonian bank and a less significant institution (LSI) for the purposes of the Single Supervisory Mechanism (SSM). While national competent authorities (NCAs) carry out most aspects concerning LSIs’ day-to-day prudential supervision, the ECB has exclusive competence for the authorisation of a credit institution and for the withdrawal of the banking licence under Article 4(1)(a) of the SSM Regulation (SSMR).

The Estonian NCA (FSA) had from 2015 onwards found significant failings in Versobank’s anti-money laundering and countering terrorism financing (AML/CFT) risk management and governance arrangements. Versobank had consistently failed to address these issues despite a number of measures taken by the FSA including several on-site inspections, meetings and instructions.

This led the FSA to propose the withdrawal of Versobank’s licence to the ECB and to determine, in its role as national resolution authority (NRA), that the bank was failing or likely to fail (FOLTF) within the meaning of Article 18(1)(a) of the Single Resolution Mechanism Regulation (SRMR).

The FOLTF declaration was made on the ground that Versobank violated the conditions for authorisation, meaning its licence would be withdrawn as provided in Recital 57 of the SRMR. The FSA however determined that there was no public interest in adopting resolution measures and no resolution scheme would be adopted as the cumulative conditions in Article 18(1) of the SRMR were not all met.

The ECB adopted a decision to withdraw Versobank’s licence in March 2018. Following that decision, Versobank – in addition to bringing proceedings – requested an administrative review of the ECB’s decision which resulted in an opinion by the Administrative Board of Review that an identical decision be adopted. The ECB adopted such an identical decision, replacing the first in July 2018, which Versobank again challenged. The two proceedings were later joined. 

Versobank’s claims and the court’s reasoning for dismissal

Versobank’s action to annul the ECB’s decision was primarily based on two arguments:

  • The ECB was only competent to withdraw authorisations on prudential grounds and not for breaches of AML/CFT requirements (AML/CFT Ground); and
  • The ECB did not have the power to withdraw its authorisation if an NRA adopted an FOLTF decision prior to the withdrawal (FOLTF Ground).

The court rejected both arguments and upheld the ECB’s decision on both grounds:

  • AML/CFT Ground: Article 4(1)(a) of the SSMR gives the ECB exclusive competence for decisions concerning licence withdrawals within the SSM on any of the grounds set out in CRD IV not limited to prudential rules. Serious breaches of national provisions implementing EU AML/CFT legislation are specifically mentioned as grounds for withdrawal in CRD.
  • FOLTF Ground: While a FOLTF assessment adopted under the SRMR and a withdrawal of authorisation were interconnected in that an FOLTF decision could be based on the fact that the conditions for authorisation were no longer satisfied (as was the case on the present facts), they were not functionally equivalent. As the court had decided in Case T-281/18 ABLV Bank, an FOLTF decision was merely a preparatory act to the adoption of a resolution action but did not constitute a formal decision. The ECB was therefore not barred from subsequently adopting a decision withdrawing authorisation. Only where the NRA decided to adopt a resolution measure under the SRMR would the ECB need to give precedence to the SMR regime. In the present case, however, the FSA had already decided that such measures were not in the public interest.

Key takeaways

Competence to withdraw banking licence for AML/CFT breaches

The Versobank decision effectively illustrates the importance of AML/CFT compliance in the existing EU legislative environment. This becomes all the more relevant with the introduction of the new EU AML/CFT legislative package, that we have considered in more detail in our blog post on the ECB opinions on the EU anti-money laundering package.

Interplay between FOLTF declaration and licence withdrawal

The Versobank decision brought to the forefront the need for clarification on the interaction of the resolution conditions under the SRMR and the withdrawal of a licence under the CRD. Its importance is made clear by the fact that the issue has been taken up in the Commission’s CRD VI proposal (part of the Banking Package 2021). The proposed amendments include a new Article 18(g) that essentially codifies the court’s decision. It clarifies that a FOLTF declaration is a ground for withdrawal provided that resolution action is not in the public interest.

Challenging a decision post administrative review

The Versobank judgment is also procedurally relevant as it establishes that an action for annulment is no longer admissible once administrative review has led to the replacing of the original decision by a new one, or to a revocation of the decision under review. 

An applicant no longer has an interest in contesting a decision once it has been repealed (whether revoked or replaced with a new decision). The court held that the replacement of the initial decision meant the initial decision disappears from the legal order, so that the applicants in the proceedings against the pre-review decision no longer had an interest in its annulment. In order to succeed, an applicant that has sought administrative review should contest the decision adopted after the review.

Further Reading

Read the full Versobank judgment here.

Versobank has filed an appeal against the judgment. See the application setting out the grounds of appeal here.  

 

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