Deconstructing de-banking: a recent case study

However taking such steps poses risks to financial institutions where a decision to de-bank is not supported by evidence setting out the validity of the decision.  In a rare instance of judicial consideration of de-banking, the New South Wales Supreme Court recently handed down a judgment in Human Appeal International Australia v Beyond Bank Australia Ltd (No 2) [2023] NSWSC 1161 (Beyond Bank).  This article sets out the key facts of Beyond Bank and the implications that it may have upon the Australian banking industry going forward.  

De-banking in Australia

De-banking is the practice of declining or limiting the provision of financial services to businesses or industry sectors, usually when they are assessed as having high regulatory, reputational, or financial risks.  The most common regulatory risks taken into account when financial institutions de-bank are money laundering and terrorism financing (ML/TF) risks. De-banking can impact individuals, businesses, non-governmental organizations, or even entire countries that are considered high-risk or non-compliant with anti-money laundering/counter-terrorism financing (AML/CTF) laws, sanctions, or other regulatory standards.²

In light of the above, the Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia's financial intelligence unit and AML/CTF regulator, released new guidance in 2023 setting out its recommended steps where a financial institution determines to discontinue providing services to a customer.³ These include:

• in all cases, recording the rationale in writing for declining to provide services to the customer if done to comply with an AML/CTF program,
• if possible, giving existing customers sufficient notice of the intention to discontinue providing services to allow them to find an alternative financial institution, and
• if possible, provide meaningful reasons to customers for deciding not to provide financial services.

Earlier this year, the Australian Government also released its response to an advice issued by the Council of Financial Regulators advising on potential policy responses to de-banking in Australia.⁴   Among other proposed recommendations and measures, it suggests that the following measures should apply to all instances of de-banking:

• banks document reasons for de-banking a customer;
• banks provide a customer with reasons for being de-banked;
• banks ensure a de-banked customer who is an individual or small business has access to their Internal Dispute Resolution procedures;
• banks provide a minimum of 30 days’ notice before closing existing core banking services of a customer.

None of these recommended steps or proposed measures appear to have been undertaken in Beyond Bank.

Beyond Bank

Beyond Bank Australia Ltd (BBA), attempted to de-bank a customer, Human Appeal International Australia (Human Appeal), a registered charity, under a clause in its terms and conditions which allowed it to close any account without giving a reason.⁵

The same terms and conditions also included by way of reference a voluntary code of practice (COP) which required, among other things, that BBA act with honesty and integrity with its customers and to balance their needs and interests with the bank’s obligations.⁶

BBA initially declined to provide a reason for the de-banking, asserting its right in its terms and conditions to close accounts without giving a reason.  Human Appeal challenged the bank’s decision.

At hearing, the bank conceded that given the reference to the code in its terms and conditions, it was required to have a legitimate commercial reason to close Human Appeal’s accounts.  It then justified the closure of the accounts due to the alleged volume and complexity associated with reviewing the transactions from Human Appeal, increasing the burden on its AML/CTF team.⁷   The Court did not accept these reasons, and suggested that in these circumstances BBA could have communicated its concerns to Human Appeal.⁸

In response to this, BBA submitted that it could not provide any further information due to the “tipping off” prohibitions contained in section 123 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). The Court also did not accept this explanation.⁹  The Court stated that the AML/CTF Act did not prevent BBA from explaining the general administrative burden it faced without going into detail regarding specific transaction reports.¹⁰ The Court also noted that BBA could have sought permission from AUSTRAC to disclose more information, and perhaps to the Court only (rather than the other parties to the proceedings), for its defence if prohibitions in the AML/CTF Act applied, but BBA had not done so.¹¹

The Court ultimately held that the account closure was invalid as BBA had not provided reasons sufficient to demonstrate that it had a legitimate commercial basis to de-bank Human Appeal.¹²   Separately, the Court also indicated that the terms that BBA had in its contract with Human Appeal that allowed it to close Human Appeal’s accounts without a reason were not “fair”.

Key takeaways

In conjunction with the AUSTRAC guidance and the policy recommendations, Beyond Bank provides guidance on the appropriate way for financial institutions to engage in de-banking in order to create a fairer and transparent process, as well as providing a basis to defend the decisions made in attempting to comply with regulatory requirements when those decisions are challenged.  The key points to note are:

• Financial institutions should maintain records of why decisions to de-bank are made.
• Citing vague “AML/CTF obligations” or “tipping off” provisions when declining to provide reasons for de-banking to a customer is not appropriate, and may actually increase the risk of tipping off the customer.
• Depending on the contractual terms and conditions (including any industry codes incorporated by reference), and the fairness of those terms, banks may need to have and justify a commercial basis for de-banking a customer, particularly where that customer is a small business or individual.
• Express contractual powers to terminate bank-customer relationship may be influenced by incorporated voluntary codes that require honesty, fairness and reasonableness.

Footnotes

<sub>1. https://www.austrac.gov.au/new-guidance-released-debanking
2. https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Financial_Technology_and_Regulatory_Technology/AusTechFinCentre/Final_report/section?id=committees%2Freportsen%2F024747%2F77284 paragraph 4.2 and 4.3.
3. https://www.austrac.gov.au/business/core-guidance/financial-services-customers-financial-institutions-assess-be-higher-risk 
4. See https://treasury.gov.au/sites/default/files/2023-06/p2023-404377-gr.pdf for the response.  See https://www.cfr.gov.au/publications/policy-statements-and-other-reports/2022/potential-policy-responses-to-de-banking-in-australia/ for the report.
5. Human Appeal International Australia v Beyond Bank Australia Ltd (No 2) [2023] NSWSC 1161 [6] .
6. Ibid [44]. 
7. Ibid [127]. 
8. Ibid [76]. 
9. Ibid [71]-[78]. 
10. Ibid [76]. 
11. Ibid [76]. 
12. Ibid [136].</sub>