High Court guidance will reassure banks acting to freeze accounts suspected of holding proceeds of crime

Out-Law Legal Update | 19 Jul 2019 | 9:26 am | 4 min. read

On 8 July 2019, the High Court issued its judgment on a claim for breach of contract brought by an unnamed money services business (N) against the Royal Bank of Scotland (RBS). The court rejected the claim that RBS had terminated the service's banking relationship in breach of the contractually agreed notice period, which the company said had resulted in extensive loss to its business.

  • High Court rules on claim for breach of contract
  • Clarity provided on banks' rights to close accounts suspected of holding proceeds of crime
  • N v Royal Bank of Scotland plc [2019] EWHC 1770 (Comm)

The key contractual terms

Clause 9.4 of RBS' account terms read:

The Bank will give the Customer not less than 60 days' written notice to close an account, unless the Bank considers there are exceptional circumstances.

Clause 13.1 read:

The Bank shall have no liability for, and may delay or refuse to process or proceed with pro-cessing any payment if (i) in its reasonable opinion it is prudent to do so in the interests of crime prevention or in compliance with laws including sanctions laws or regulations, or (ii) such delay or refusal is a consequence of checks carried out as part of the proper operation of the Bank's payprocessing systems.

The facts

N operated foreign exchange trading and other financial services and held approximately 60 accounts with RBS. It had an annual turnover of about £700 million through these accounts, but the judge described N's anti-money laundering systems and controls at the time of the alleged breach as "materially inadequate".

By October 2015, RBS had identified that there were ten sub-accounts which it suspected contained proceeds of crime. Of these, nine were believed to be 'boiler rooms' which laundered the proceeds of fraudulent investments sold by illegal call centre operations. RBS froze these sub-accounts on 8 October 2015. Subsequently, however, an attempt was made to make a payment of £500,000 through one of the main accounts "in an apparent effort to circumvent the freeze on the frozen sub-accounts."

Simon Kingsbury, RBS director of financial crime and group money laundering reporting officer, was called to give evidence and explained the rationale behind the bank's decision on 9 October 2015 to freeze all of N's accounts, seek National Crime Agency consent to return client funds and terminate the bank's relationship with N with immediate effect. According to the ruling, Kingsbury noted that there was an exceptional level of concern about N's activities, and that the relationship with RBS had broken down and needed to be terminated. The three possible exit routes which RBS considered were:

  • to use the contractual notice period set out in clause 9.4 and seek consent from the National Crime Agency before executing any payment in or out of N's accounts during that period. Kingsbury's view was that this would constitute an abuse of the Suspicious Activity Report (SAR) regime;
  • to use the contractual notice period but maintain the freeze on N's accounts. This, Kingsbury was told, would expose the bank to a high level of litigation risk from N and its clients, all of whom would be denied access to their funds during that period; or
  • to terminate the contract with immediate effect, relying upon the second limb of clause 9.4. It was this option that RBS pursued and which formed the subject of the dispute.

N's argument rejected

N's argument before the High Court was that RBS in fact had a number of other options which it could have pursued without having to terminate the contract with immediate effect. These included ring-fencing the suspect funds, preventing further credits to the accounts from N's clients and seeking consent on a daily basis by way of an omnibus SAR.

The court rejected these and each of N's other arguments. In most instances, the reason given was that the level of justified concern was at much too high a level for any of the alternatives to be responsibly pursued. The £500,000 attempted payment was evidence of the actions which N and its clients appeared willing to take in order to circumvent the bank's initial freeze on selected accounts - that being a form of ring-fencing - and a measure of the seriousness of the situation.

As well as presenting the alternatives, N's counsel set out why the decision to terminate immediately without notice constituted a breach. These were that RBS had not accounted for the possible destruction of N's business that would result, that the accounts which RBS froze did not constitute the entirety of RBS's relationship with N, and that "short of established complicity or proven fraud" the decision to close the account without notice could not be a rational interpretation of 'exceptional circumstances' as set out in clause 9.4. The High Court roundly rejected each of these arguments as either unsubstantiated or irrelevant. In particular, the judge noted that the words used in clause 9.4 were "exceptional circumstances", not "where there is established complicity or proven fraud."

The impact

This is a positive decision from the perspective of major UK banks, which are increasingly shouldering the burden of fraud prevention and money-laundering protection within the financial system.

Clause 9.4 of RBS' bank account terms is typical of those set by other retail banks in the UK, and many will welcome the broad and pragmatic scope which the court gave to the words 'exceptional circumstances' in this context. Although ring-fencing of suspect funds was considered as an alternative, the court accepted that RBS' decision not to adopt it was reasonable in the circumstances.

Whilst the judgment provides some useful guidance, the facts of this case are perhaps extreme. The £500,000 attempted payment appears to have been an aggravating factor. Many scenarios which banks face may not be as starkly concerning, and banks should note that RBS took the intermediate step of freezing certain sub-accounts.

On the other hand, money services businesses may seek more contractual clarity about the circumstances in which their bank account contract can be terminated without notice. Many may desire a more collaborative process through which they might be able to identify and address money laundering concerns without any impact on their banking relationship.