On 8 July 2019, in the case of N v the Royal Bank of Scotland plc, the High Court (the Court) handed down a judgment which provides guidance on how banks respond to alleged money laundering activities.
N, an authorised payment institution, issued proceedings for an interim mandatory injunction against the bank after it decided to freeze a number of accounts that N held and to terminate the banking relationship without notice. The decision to end the contract was made based upon the bank’s suspicion that several of N’s customers were perpetrating boiler room scams on vulnerable individuals. In addition, the bank suspected that credit balances in N’s main accounts and some of its dedicated customer accounts constituted criminal property.
The bank claimed that the terms of its banking contract with N allowed the termination of the contract without notice whenever exceptional circumstances existed. It argued that this provision was triggered by the fact that a number of N’s customers were suspected of being engaged in investment fraud as well as the suspicion that these accounts held the proceeds of crime.
The Court rejected all claims brought against RBS, and determined that RBS’ actions were reasonable and fully justified. The Court rejected the argument that RBS should have taken an alternative course to avoid closing N’s accounts, including ring-fencing suspected proceeds of crime or manually reviewing transactions on the accounts.
The judgment suggests that, bearing in mind that most banking contracts will include an “exceptional circumstances” termination clause, developing suspicion that a customer is dealing with the proceeds of crime may be considered an exceptional circumstance and, therefore, could be a valid reason for banks to terminate a contract without notice. Consequently, banks may in appropriate circumstances have more latitude to manage their risks as they see fit rather than, for example, ring-fencing (which can, as the Law Commission has recently noted, cause further issues under UK money laundering legislation). This is another example of a case which protects UK banks’ position in dealing with customers suspected of money laundering (see also our previous blog post).