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What should banks do if they suspect that customers’ accounts contain proceeds of crime?

Definition of fraud Print publication

02/09/2019

Why is this case of interest?

Money laundering and fraud are key risks facing the industry today. Andrew Beck highlights the recent Commercial Court case of N v The Royal Bank of Scotland Plc [1], which has practical implications for institutions which suspect that customers’ accounts may contain the proceeds of crime.

What happened in this case?

The claimant, N, was an authorised payment institution which banked with RBS.  In October 2015, after what are described in the judgment as “dozens of red flags”, RBS froze accounts held by N and terminated the banking relationship without notice on the basis that it suspected that some of N’s accounts contained the proceeds of ‘boiler room’ (that is, investment fraud) scams and money laundering.  N commenced proceedings for breach of contract and negligence, challenging the lawfulness of RBS’s actions and claiming that RBS had failed to exercise is contractual discretion rationally and reasonably. RBS defended the claim, arguing that under its contract with N it was entitled to terminate without notice in exceptional circumstances; and that its suspicions that some of N’s customers were engaged in fraud/money laundering and that some of its accounts contained the proceeds of crime, constituted exceptional circumstances. The High Court (Commercial Court) agreed with the Bank and rejected N’s claims in full.

What are the practical implications?

Financial institutions should note the following key takeaways:

  • the court recognised that different decisions could have been taken by the RBS when its suspicions arose. However – and this is crucial – “the availability of other decisions within the range of decisions that are honest, rational and reasonable does not mean that the decision taken by [RBS] fell outside the range of decisions properly open to [it]. It was an honest, rational and reasonable decision[2]
  • RBS was able to prove to the court that its decision to freeze accounts to terminate N’s banking relationship was: honest and held in good faith; rational and met the standard of objective reasonableness; and that its discretion was exercised in a reasonable manner.
  • the circumstances of the case fully justified the steps taken by the bank
  • the bank’s opinion that those steps were prudent in the interests of the prevention of crime was considered, reasonable and based on a sound understanding of relevant legal principles
  • RBS adopted a proportionate approach. It considered the adverse impact that a freezing injunction would have on N’s business, and tailored its actions accordingly.

The key practical implications are therefore that:

  • where a financial institution suspects that customers’ accounts may contain proceeds of crime, it should be able to confidently proceed to take decisive action so long as:
    • those suspicions are genuinely and honestly held (for example, where an institution’s fraud prevention measures reveal potential wrongdoing)
    • any proposed action is properly considered, objectively reasonable and proportionate to the potential risks identified
    • any action taken is based on a correct understanding of all relevant legal principles
  • appropriate responsive action in a case like this one might include obtaining a freezing injunction in respect of suspected accounts and/or terminating a banking contract (as here), and/or it may involve the ring-fencing of suspected proceeds of crime, manually reviewing and operating suspected accounts, and/or preventing further credits/transactions on those accounts. Each case will turn on its own facts
  • in addition, the wider, public interests of the prevention of crime and the protection of victims of crime will come in to play
  • full and accurate record-keeping of any suspicions held, and of the decision-making process in response to those, will assist evidentially if and when any challenge to an institution’s approach is made
  • staff training, and the implementation (and maintenance) of policies and procedures relating to both the recognition of, and the response to, fraud/money laundering risks is essential to protect the financial institution itself and, of course, its customers.

If you would like any further advice or assistance in relation to any of the issues raised by this case, please do not hesitate to contact Andrew Beck or any member of the Banking & Finance Litigation Team.

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[1] [2019] EWHC 1770 (Comm)
[2] Ibid. para 94

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