Termination of bank accounts on the basis of compliance issues or strategic reorientation is a new phenomenon in the Netherlands. This blog provides an overview of the case law with regard to such terminations, followed by an evaluation of the legal framework that has now been formed.
Introduction
Termination of bank accounts is a phenomenon that did not actually exist until a few years ago. That has changed. Spurred on by sky-high fines and invasive investigations by the Public Prosecutor and the Dutch Central Bank (DNB), banks are now busy with far-reaching measures regarding know your customer (KYC) and client due diligence (CDD) investigations, in particular aimed at countering money laundering. An ultimate measure could be to close the current accounts of companies that are suspected of money laundering or that provide insufficient information or cooperation to the bank's investigation. Not seldom banks also indicate that the business, that a particular client is active in, does no longer match the risk appetite of the bank or the bank simply indicates that the client profile does no longer match due to a strategic reorientation.
Good to mention is that banks generally are contractually authorized to terminate bank accounts without any default being present. This of course has far-reaching consequences for individual clients, especially if those clients don’t have a bank account with another bank. Without a bank account, it is impossible to participate in economic transactions. Case law (therefore) dictates that bank cannot always use their authority to terminate bank accounts.
Legal framework
Over the past decade, a legal framework has emerged in the context of the termination of credit agreements and in particular overdrafts that can serve as a general framework for terminating banking relationships, including the bank account. This framework has been laid down in the landmark ruling of the Dutch Supreme Court in a case an individual client raised against ING, the ING/De Keijzer ruling. In short, the Supreme Court ruled that if a bank uses its authority to terminate the credit agreement, the legal validity of that termination must be assessed on the basis of the agreement and the standard of section 6: 248 paragraph 2 Dutch Civil Code. The latter implies that the termination by the bank on the basis of that authority is not legally valid if use of that authority is unacceptable according to the standards of reasonableness and fairness, given the circumstances of the case. Within this reasonableness and fairness test, weight can be awarded to the duty of care the bank has against its clients on the basis of the General Banking Conditions.
It is generally assumed that the aforementioned legal framework mutatis mutandis also applies to the termination of bank accounts, even if no credit facility is in place. This framework is however supplemented by the following. As we indicated before, the use of a bank account is of vital importance to participate in economic transactions. This will bear weight in the reasonableness and fairness test. On the other hand, the client of a bank is obliged to answer reasonable information requests by the bank, amongst others on the basis of the General Banking Conditions. In particular, the client must enable the bank to comply with its legal and contractual obligations. Further, the client must not make improper or unlawful use (or allow improper use) of the product (bank account), including use that is contrary to law and regulations, is subservient to criminal offenses or is harmful to the bank or its reputation or to the integrity of the financial system.
The most important legal obligations for Dutch banks in this respect are the obligations all financial institutions have under the Money Laundering and Terrorist Financing (Prevention) Act (Wwft). A central concept in the Wwft is risk management. The obligations under the Wwft should ensure that the bank has an adequate policy to control the risks of money laundering or terrorist financing. Factors that can pose an integrity risk relate to clients, services, products, transactions, delivery channels and country or geography. These risk factors are the starting point for the identification and assessment of integrity risks.
The next step of the Wwft policy is customer due diligence. Banks should apply customer due diligence measures to each client, but the intensity can be tailored to the risk posed by a particular type of client, relationship, product or transaction. This is also referred to as the "risk-based" approach.
Article 3 paragraph 5 Wwft describes the cases, in addition to entering into the relationship, when additional client investigation must be carried out. This is the case, among other things, if there are indications of involvement in money laundering or terrorist financing and if the bank has doubts about the reliability of previously obtained data. The obligation to carry out a "continuous check" as described in Article 3 paragraph 2 Wwft also implies a (periodic) assessment moment and keeping the information available about the client up to date. In other words, client investigation does not end after the customer has been accepted by the bank. This is the main reason why banks continuously ask their clients about the current situation.
Case law regarding the termination of bank accounts
We have performed an investigation to recently published case law regarding the termination of bank accounts and have identified the following trends.
Bitcoins
There are two court cases where the bank terminated the accounts of clients active in the trade of bitcoins. In both cases the court found important that the trade in bitcoins is regarded as a particularly risky activity. Furthermore, the purchases were made almost exclusively by cash payments and the clients of the bank had hardly investigated the origin of the money nor provided the bank with convincing evidence that the fund flows were legitimate. In both cases, the court ruled the termination to be valid.
Sectors connected with more risk
There is quite some case law regarding termination of clients operating in sectors such as gambling, adult entertainment and coffeeshops, where it is a fact of public knowledge that more risks are connected with the flow of funds. In these sector cash money is also more common, which makes it even more risky for banks. Banks are allowed to terminate bank accounts with clients active in these sectors, especially when those clients neglected to inform the bank about their activities.
Insufficient cooperation, dubious business practices
In some cases, the termination is based upon insufficient cooperation by the client to the bank's investigation without any concrete suspicions of money laundering. In most cases, this concerned UBO (ultimate beneficial owner) related issues or dubious commercial practices that could endanger the reputation and integrity of the bank.
Trust offices
Throughout the market, we have seen terminations based upon a generic policy change regarding trust offices and the companies they manage, in view of potential reputational damage and the increased costs of the KYC investigation. There were no (concrete) suspicions of money laundering and no other Wft or Wwft related problem whatsoever. Nevertheless, the court ruled the terminations on that basis to be valid, whilst obeying a notice period of, 6/12 months (after date of rulings) for the managed companies, and 2 years for the trust office.
Conclusion
The enormous efforts and costs arising from their gatekeeper function are not only a serious problem for the bank but also for the (potential) client of the bank. Banks are, understandably, already very reluctant, to facilitate a bank account for clients who have placed their management with a trust office. The same applies for new customers whose only 'sin' consists of the fact that they are active in branches with a higher risk profile or part of a more complex (international) structure. The fact that in practice there are no concerns whatsoever regarding this kind of clients is of less importance. This is not a reproach against banks, but rather the result of the sometimes ‘mission impossible’ attributed to them by the regulator. The result can and will in the meantime be, that a group of companies will emerge that may unduly become "unbankable". Paradoxically, this can also lead to such companies being in fact forced to work more with cash, and thus increasing the risk for society.
In this environment recently many clients of banks have received notice that their bank accounts will be closed. We believe that without a concrete suspicion and for those clients not active in a publicly known high risk sector, there are strong arguments against such termination. It is however of utmost importance to fully and swiftly cooperate with reasonable requests of the bank for information. Building a case file is very helpful if it would come to litigation. Should you have any questions, or if you are faced with the threat of termination, please contact us for assistance.
Termination of bank accounts on the basis of compliance issues or strategic reorientation is a new phenomenon in the Netherlands. This blog provides an overview of the case law with regard to such terminations, followed by an evaluation of the legal framework that has now been formed.
Introduction
Termination of bank accounts is a phenomenon that did not actually exist until a few years ago. That has changed. Spurred on by sky-high fines and invasive investigations by the Public Prosecutor and the Dutch Central Bank (DNB), banks are now busy with far-reaching measures regarding know your customer (KYC) and client due diligence (CDD) investigations, in particular aimed at countering money laundering. An ultimate measure could be to close the current accounts of companies that are suspected of money laundering or that provide insufficient information or cooperation to the bank's investigation. Not seldom banks also indicate that the business, that a particular client is active in, does no longer match the risk appetite of the bank or the bank simply indicates that the client profile does no longer match due to a strategic reorientation.
Good to mention is that banks generally are contractually authorized to terminate bank accounts without any default being present. This of course has far-reaching consequences for individual clients, especially if those clients don’t have a bank account with another bank. Without a bank account, it is impossible to participate in economic transactions. Case law (therefore) dictates that bank cannot always use their authority to terminate bank accounts.
Legal framework
Over the past decade, a legal framework has emerged in the context of the termination of credit agreements and in particular overdrafts that can serve as a general framework for terminating banking relationships, including the bank account. This framework has been laid down in the landmark ruling of the Dutch Supreme Court in a case an individual client raised against ING, the ING/De Keijzer ruling. In short, the Supreme Court ruled that if a bank uses its authority to terminate the credit agreement, the legal validity of that termination must be assessed on the basis of the agreement and the standard of section 6: 248 paragraph 2 Dutch Civil Code. The latter implies that the termination by the bank on the basis of that authority is not legally valid if use of that authority is unacceptable according to the standards of reasonableness and fairness, given the circumstances of the case. Within this reasonableness and fairness test, weight can be awarded to the duty of care the bank has against its clients on the basis of the General Banking Conditions.
It is generally assumed that the aforementioned legal framework mutatis mutandis also applies to the termination of bank accounts, even if no credit facility is in place. This framework is however supplemented by the following. As we indicated before, the use of a bank account is of vital importance to participate in economic transactions. This will bear weight in the reasonableness and fairness test. On the other hand, the client of a bank is obliged to answer reasonable information requests by the bank, amongst others on the basis of the General Banking Conditions. In particular, the client must enable the bank to comply with its legal and contractual obligations. Further, the client must not make improper or unlawful use (or allow improper use) of the product (bank account), including use that is contrary to law and regulations, is subservient to criminal offenses or is harmful to the bank or its reputation or to the integrity of the financial system.
The most important legal obligations for Dutch banks in this respect are the obligations all financial institutions have under the Money Laundering and Terrorist Financing (Prevention) Act (Wwft). A central concept in the Wwft is risk management. The obligations under the Wwft should ensure that the bank has an adequate policy to control the risks of money laundering or terrorist financing. Factors that can pose an integrity risk relate to clients, services, products, transactions, delivery channels and country or geography. These risk factors are the starting point for the identification and assessment of integrity risks.
The next step of the Wwft policy is customer due diligence. Banks should apply customer due diligence measures to each client, but the intensity can be tailored to the risk posed by a particular type of client, relationship, product or transaction. This is also referred to as the "risk-based" approach.
Article 3 paragraph 5 Wwft describes the cases, in addition to entering into the relationship, when additional client investigation must be carried out. This is the case, among other things, if there are indications of involvement in money laundering or terrorist financing and if the bank has doubts about the reliability of previously obtained data. The obligation to carry out a "continuous check" as described in Article 3 paragraph 2 Wwft also implies a (periodic) assessment moment and keeping the information available about the client up to date. In other words, client investigation does not end after the customer has been accepted by the bank. This is the main reason why banks continuously ask their clients about the current situation.
Case law regarding the termination of bank accounts
We have performed an investigation to recently published case law regarding the termination of bank accounts and have identified the following trends.
Bitcoins
There are two court cases where the bank terminated the accounts of clients active in the trade of bitcoins. In both cases the court found important that the trade in bitcoins is regarded as a particularly risky activity. Furthermore, the purchases were made almost exclusively by cash payments and the clients of the bank had hardly investigated the origin of the money nor provided the bank with convincing evidence that the fund flows were legitimate. In both cases, the court ruled the termination to be valid.
Sectors connected with more risk
There is quite some case law regarding termination of clients operating in sectors such as gambling, adult entertainment and coffeeshops, where it is a fact of public knowledge that more risks are connected with the flow of funds. In these sector cash money is also more common, which makes it even more risky for banks. Banks are allowed to terminate bank accounts with clients active in these sectors, especially when those clients neglected to inform the bank about their activities.
Insufficient cooperation, dubious business practices
In some cases, the termination is based upon insufficient cooperation by the client to the bank's investigation without any concrete suspicions of money laundering. In most cases, this concerned UBO (ultimate beneficial owner) related issues or dubious commercial practices that could endanger the reputation and integrity of the bank.
Trust offices
Throughout the market, we have seen terminations based upon a generic policy change regarding trust offices and the companies they manage, in view of potential reputational damage and the increased costs of the KYC investigation. There were no (concrete) suspicions of money laundering and no other Wft or Wwft related problem whatsoever. Nevertheless, the court ruled the terminations on that basis to be valid, whilst obeying a notice period of, 6/12 months (after date of rulings) for the managed companies, and 2 years for the trust office.
Conclusion
The enormous efforts and costs arising from their gatekeeper function are not only a serious problem for the bank but also for the (potential) client of the bank. Banks are, understandably, already very reluctant, to facilitate a bank account for clients who have placed their management with a trust office. The same applies for new customers whose only 'sin' consists of the fact that they are active in branches with a higher risk profile or part of a more complex (international) structure. The fact that in practice there are no concerns whatsoever regarding this kind of clients is of less importance. This is not a reproach against banks, but rather the result of the sometimes ‘mission impossible’ attributed to them by the regulator. The result can and will in the meantime be, that a group of companies will emerge that may unduly become "unbankable". Paradoxically, this can also lead to such companies being in fact forced to work more with cash, and thus increasing the risk for society.
In this environment recently many clients of banks have received notice that their bank accounts will be closed. We believe that without a concrete suspicion and for those clients not active in a publicly known high risk sector, there are strong arguments against such termination. It is however of utmost importance to fully and swiftly cooperate with reasonable requests of the bank for information. Building a case file is very helpful if it would come to litigation. Should you have any questions, or if you are faced with the threat of termination, please contact us for assistance.