Bank terminates account based on AML/CTF risk assessment

The recent case of Merciful Group Incorporated v Norfina Limited concerned the ‘de-banking’ by Norfina Limited t/as Suncorp Bank (Suncorp) of Merciful Group Incorporated (Merciful), a charity established to provide aid to various countries, including Lebanon, Yemen and the Syrian Arab Republic.

‘De-banking’ is when a bank terminates a customer’s account or refuses to continue to provide them with banking services. Suncorp terminated Merciful’s account due to concerns raised by the following circumstances, among others:

• Merciful was sending large amounts of money to a third-party remitter (which is consistent with ‘layering’, a well-known technique for money laundering (ML) coupled with high-risk country designations such as ‘Leb’, ‘Lebanon’, ‘Yem’, ‘Yemen’ or ‘Sy’;
• the source of Merciful’s wealth was unable to be established; and
• reported donations increased over a short period by 225% when the economic climate made this unusual.

Suncorp argued that it was entitled to de-bank Merciful in accordance with clause 15.2 of the relevant terms and conditions, which provided:

We can close your Account immediately if:

…

c) to protect our Legitimate Interests;

d) we need to by law or to meet our prudential requirements…

The terms and conditions defined 'Legitimate Interests' as:

[Suncorp's] legitimate business needs, prudential requirements and/or security requirements (including any reasonable response to material changes to [Suncorp’s] business or systems) and any requirements that are reasonably necessary to protect [Suncorp] against a material risk of:

…

(d) [the Bank’s] financial detriment.

Merciful argued that Suncorp was required to retain them as a customer and its attempt to terminate their relationship was ineffective on the following key grounds:

• Suncorp lacked any ‘legitimate basis’ under clause 15.2 to terminate the relationship and its attempt to do so was in breach of both the express and implied terms of the terms and conditions.
• Under clause 15.2 of the terms and conditions, Suncorp could only close the account if it was ‘necessary’ for them to do so, arguing:
  • ‘Necessity’ does not mean convenience, expedience or preference but ‘indicates a standard of reasonable compulsion’.
  • to show necessity, Suncorp must show there was a present or imminent threat to one of its defined interests, which could not reasonably be mitigated other than by termination of Merciful’s account, and the basis for this conclusion rested on objective facts.
  • ‘Legitimate interests’, as defined under the terms and conditions, are not ‘open ended’ but are confined to legitimate business needs, prudential requirements and security requirements. They do not include risk appetite, reputational concerns or subjective discomfort.

Merciful submitted that ‘necessity’ had not been demonstrated because:

• Suncorp’s decision to close the account was a unilateral judgment and not the result of a compliance process or regulatory directive;
• Suncorp had not presented evidence that Merciful had engaged in ML and did not work with them to determine if it had (ie it did not give Merciful the opportunity to respond to or clarify its transactions); and
• the asserted ML/TF risks were speculative and unsupported by regulator engagement or finding.

Merciful argued that had Suncorp investigated the asserted ML/TF conduct, the investigation would have shown innocent and charitable explanations for the triggers they noticed.

Suncorp relied on clause 15.2 to close the account and argued:

• It operates in a highly regulated and public policy driven environment under which it is required to act to reduce risk that its services might involve or facilitate ML or TF and what constitutes its ‘legitimate interests’ must be viewed in this context.
• It is entitled and required to set and comply with its risk appetite guidelines and discharge itself of risks it is unwilling to take. It has a legitimate business need to operate within its chosen risk tolerance, to comply with its internal risk policies and procedures and fulfil its statutory obligations.
• Its decision to terminate Merciful’s account was taken in protection of its legitimate interests, and the terms and conditions do not require it to form a view about the ultimate purpose of activity that has been detected.

The Court returned to clause 15.2 of the terms and conditions and reiterated that, while poorly drafted, they provided:

            We can close your account immediately … to protect our Legitimate Interests

The Court rejected Merciful’s central argument that the operation of clause 15.2 required Suncorp to have a ‘necessity’ to terminate the account. 

On Suncorp’s business needs, and its ‘Legitimate Interests’, the Court considered they must be factors to which rational regard may be had as requiring protection, and this regard was to be objectively assessed. Central to dismissing Merciful’s claim was the Court’s finding that protecting against the risk of designated services provided by Suncorp being used for ML/TF and protecting against the risk of financial detriment from that being the case is self-evidently a legitimate business need and prudential requirement.

On whether Suncorp was entitled to close the account under clause 15.2, the Court found that this required only a rational or bona fide judgment, or that a rational honest opinion or belief be held, that that step should be taken. That is, Suncorp did not need to point to facts to justify the closure or otherwise give Merciful an opportunity to respond before it exercised its right to terminate the account, again because the wording of the clause did not require this action.

Ultimately, the Court found that Suncorp acted rationally, honestly, and in good faith in its response. Closing the account was in line with the terms and conditions, reasonable and for a proper purpose. 

A bank may ‘de-bank’ a customer without proving misconduct or giving the customer an opportunity to respond, where permitted under the relevant terms and conditions. Depending on the wording of the terms and conditions, a bank can likely rely on risk appetite, prudential concerns and regulatory obligations as valid grounds for termination. This gives banks broad discretion in deciding whether to continue with a banker/customer relationship.

The Merciful case considered a bank-customer relationship, and the decision was based on the relevant facts. However, fund managers may be able to exit an investor by drawing on the principles affirmed in the case,but only if their contractual framework supports the decision. Fund managers should review whether their documentation contains any termination clauses and how robust they are. This could include offer documents, subscription agreements and fund constitutions. Fund managers will want comfort their contractual rights can be exercised to swiftly exit an investor, if necessary, to comply with their AML/CTF obligations.