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23 Jul 2019

POCA up: suspicion sufficient for bank to kiss goodbye to its customer

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Last month, the Law Commission published its final report on the system of voluntary disclosures under the Proceeds of Crime Act 2002 ("POCA") (a suspicious activity report or "SAR"), which offer the National Crime Agency (the "NCA") the opportunity to grant or refuse consent to proceed with a transaction. One of the issues considered by the Law Commission was the burden placed by the consent and disclosure provisions on businesses under duties to report suspicious activity. While change may be on the horizon, the recent High Court judgment in N v The Royal Bank of Scotland Plc provides a useful guide to a bank's duties under the current law. In particular, it addresses when a Bank can terminate a customer's account if it suspects a connection with the proceeds of crime.

Background

N carried on a money service business ("MSB") providing foreign exchange and payment services to its customers. It had banked with the Bank since 2013 and held around 60 active accounts, comprising four main accounts and separate client sub-accounts. 

On around 29 September 2015, the Bank froze seven accounts associated with certain clients of N suspected of investment fraud. The Bank suspected that victims had paid money into these accounts. The Bank reported to the NCA in connection with N's accounts on a number of occasions after then. 

In October 2015, the Bank froze all of N's accounts. By then, the Bank had identified other accounts where it suspected proceeds of crime were held and an attempted payment of £500,000 had aroused suspicion as the attempt was to use a main account in an apparent effort to circumvent the freeze on the frozen sub-accounts. 

On 15 October 2015, the NCA gave the Bank consent under POCA to return the funds to N on termination of the banking relationship. The following day the Bank gave notice to terminate all N's banking facilities with immediate effect. 

N sought damages from the Bank, claiming that the Bank was in breach of contract or negligent. 

Analysis

The account terms provided that the Bank would give N not less than 60 days' written notice to close an account, unless the Bank considered there to be "exceptional circumstances". They also provided that the Bank could refuse to process any payment if (among other things) in the Bank's reasonable opinion it was prudent to do so in the interest of crime prevention. 

The Bank argued  there were exceptional circumstances justifying the closure of N's accounts without notice. It had suspected that credit balances on the main accounts constituted or represented benefit from criminal conduct and that N was engaged (whether innocently or otherwise) in money laundering. 

The focus of N's challenge was: (i) that there was no suspicion of complicity by N in money laundering; (ii) that N was not suspected of being involved in the 'evasion' in relation to the attempted £500,000 payment; and (iii) that it was incumbent on the Bank to investigate the issue of commingling between the sub-accounts and the main accounts and ascertain the extent of the issue. The Court rejected the claims against the Bank. 

The key findings were that:

  • the Bank's view that there were exceptional circumstances for closing the accounts without notice was (i) rational (ii) held in good faith and (iii) objectively reasonable (if it was required to meet that standard);
  • the discretion was exercised in a reasonable manner and the circumstances fully justified the steps decided on;
  • the Bank's opinion that a refusal to process payments was prudent in the interests of crime prevention was (i) reasonable (ii) reached after consideration of the material circumstances and (iii) legally correct and based on a sound understanding of the relevant legal principles; and
  • the Bank adopted a proportionate approach taking account of the adverse impact that any freeze would have on N's business and sought to tailor its actions accordingly.

Case comment

The Court's decision will provide comfort to other banks with similar terms in their contracts entitling them to terminate in exceptional circumstances where they suspect a customer is engaging (whether innocently or not) in money laundering. The Court expressly rejected the contention that the Bank was required to establish complicity or prove fraud. 

The Court's comments in relation to N's systems and controls will also be of interest to financial institutions more widely, both in considering their own systems and controls and those of their counterparties. The Court found that N's systems and controls were materially inadequate as at 2013 and 2014: onboarding of clients was left to individual account managers, who earned commission; no formal risk assessments were carried out; and the quality of document keeping was poor. While N had made progress by September 2015, its systems and controls were still not as good as they should have been. Both side's experts agreed that there were numerous failures in N's due diligence and regulatory compliance, which the Court described as "serious". 

The Court noted that systems and controls (including due diligence in relation to clients and other anti-money laundering procedures) were "of particular importance" for an MSB given the vulnerability of the service it provides to illegitimate use such as boiler room fraud. This was in its own interests, those of its clients, those it dealt with (including the Bank), and the interests of the wider public. As it was explained by one of the Bank's witnesses, "[a] very poor control environment can have almost exactly the same effect [as complicity], simply because customers who wish to launder money through that organisation have spotted the weakness.

The future for suspicious activity reports?

On the facts of this case the Court rejected each of the alternative ways put forward by N to meet the commingling issue. N's suggestion that the Bank should have sought consent from the NCA on a daily basis by way of an "omnibus" SAR was dismissed as unrealistic, inappropriate and impracticable. This is consistent with the Law Commission's report, which identified that one of the issues with the current regime is that law enforcement agencies are struggling with a significant number of low-quality reports. These are more time-intensive to process, can contribute to delay in the system and may ultimately remain of little value to enforcement agencies. 

In other circumstances, however, alternative ways may need to be found to mitigate money laundering risks short of freezing accounts (such as manually reviewing individual transactions). One of the recommendations made by the Law Commission is to introduce an exemption to allow ring-fencing of suspected criminal property as a more proportionate response than freezing entire bank accounts. 

In N v RBS, the Court made clear that the balancing of interests was not simply between the interests of a bank and its customer: there are wider public interests of the prevention of crime and the protection of the victims of crime, which are a crucial part of the picture. Those interests should also be considered as part of the decision making process.

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