De-banking: Proceed with Care

28 Nov

Introduction

De-banking is a “complex global problem” according to AUSTRAC, the regulator of Australia’s anti-money laundering law, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). De-banking refers to the withdrawal of banking services to certain customers or classes of customers. In Australia, it has been claimed that de-banking disproportionally impacts customers such as FinTechs, money transfer businesses, digital currency exchanges, and not-for-profit organisations.

There are many reasons why customers can be de-banked. One reason often given is because of the compliance requirements of the AML/CTF Act. In the UK, de-banking of customers based on their political views (political de-banking) has become a hot topic after the de-banking of several prominent figures, leading to an investigation by the UK’s Financial Conduct Authority and proposals to prohibit this practice.

The issue of de-banking has also been investigated in Australia by the Council of Financial Regulators (CFR). A CFR report released in October 2022 made recommendations on policy approaches to the Federal Government which the Government responded to at the end of June 2023. The Government has agreed to support:

voluntary data collection on de-banking by the big four banks;
implementation of transparency and fairness measures by banks in relation to de-banking, including the giving of reasons to a customer who has been de-banked and a minimum of 30 days’ notice of account closure; and
publication by the big four banks publish of guidance on their risk tolerance for FinTech, digital currency exchanges and the remittance sector.

Also in June 2023, AUSTRAC issued guidance on de-banking.

Human Appeal case

A recent decision of the Supreme Court of New South Wales concerned a bank customer who successfully challenged an attempt by its bank to de-bank the customer.

It is unusual to have a court decision on de-banking and so the case has generated a lot of interest.

The case is Human Appeal International Australia v Beyond Bank Australia Ltd (No 2) [2023] NSWSC 1161. Human Appeal International Australia (Human Appeal) is a Muslim charity and Beyond Bank Australia Limited (Beyond Bank) is a customer owned bank.

Human Appeal established two transaction accounts with Beyond Bank in March 2021 and used the accounts in the ordinary course of its charitable operations. On 11 August 2021 Beyond Bank wrote to Human Appeal, requesting that Human Appeal close its accounts because a “recent review” had led the bank to conclude that the banking business of Human Appeal was “not suited to Beyond Bank”. The bank’s notice stated that if Human Appeal did not voluntarily close its accounts, Beyond Bank would exercise its right to close all banking facilities of Human Appeal on 20 August 2021. Human Appeal responded through its lawyers, challenging the bank’s right to close the accounts and requesting more time before the accounts were closed. The bank in reply said that it would allow Human Appeal until 30 September 2021, but Human Appeal decided to start legal proceedings.

Human Appeal argued that Beyond Bank must act in good faith and reasonably and must have reasonable grounds for terminating its banking facilities.

Beyond Bank is a subscriber to the Customer Owned Banking Code of Practice (COBCOP). The 2018 version of COBCOP applied at the time of the attempt to close the accounts. It provided that standard terms and conditions would “strike a fair balance” between the customer’s legitimate needs and interests and the bank’s interests and obligations. COBCOP also said that a subscriber bank would give at least 14 days’ notice of closing an account (if permitted by the account terms and conditions), unless there were exceptional circumstances. Also included in COBCOP was a list of 10 Key Promises, including a promise to “be fair and ethical” in dealings with customers and to treat customers “fairly and reasonably”.

The Beyond Bank terms and conditions allowed for closure of an account on 20 days’ notice without giving reasons. The terms and conditions incorporated COBCOP by reference and said that if there was any inconsistency between the provisions of COBCOP and the terms and conditions, the terms and conditions were to be read as if they were varied to comply with COBCOP.

Beyond Bank’s position was that it was permitted to terminate the relationship without having to specify the reasons by providing 20 days’ notice in accordance with its terms and conditions (although the initial notice to terminate did not actually give 20 days’ notice).

The cost of monitoring Human Appeal accounts

Beyond Bank’s Chief Risk Officer gave evidence at the hearing that the cost to operate and maintain Human Appeal’s accounts was excessive, considering Beyond Bank’s community bank status. He said that Beyond Bank’s Financial Crimes team spent a significant amount of time reviewing the Human Appeal accounts due to the steady flow of donations and regular payments to the causes it supported, predominantly in developing countries. The bank argued that the Court should find that this was the reason for the decision to terminate the accounts.

This argument was not accepted by the judge. He said that Beyond Bank failed to provide any direct evidence to prove the claim about the cost of monitoring the accounts, and the Court rejected the evidence of the Chief Risk Officer on this point as “bad in form”.

Validity of termination

The bank conceded in the hearing that it was only entitled to terminate the Human Appeal banking facilities if it had a “valid commercial reason” for doing so. Because of this concession, the Court concluded that it was not necessary to examine Human Appeal’s argument that there was an implied term that the bank must act in good faith and reasonably under the contract between the bank and its customer. The Court noted though that the obligations under COBCOP to act fairly and reasonably were similar to the principles that Human Appeal had argued the bank must follow.

The Court concluded that Beyond Bank had not provided any admissible evidence which would show that it had a valid commercial reason for closing the accounts, and so the attempted closure of the accounts was invalid.

AML/CTF Act

During the litigation Human Appeal issued a Notice to Produce to Beyond Bank requesting all information relevant to its decision to close the accounts. Beyond Bank only provided bank account statements and the termination correspondence. This response concerned the judge, but counsel for the bank said that the tipping off prohibitions of the AML/CTF Act prohibited the bank from disclosing if the reason for termination related to bank’s obligations under the AML/CTF Act. The Court rejected this submission and noted that if the tipping off provisions extended that far, the bank could have applied to the CEO of AUSTRAC for permission to disclose in this case.

The Court found that even if the burden of complying with the AML/CTF Act was a valid commercial reason for closing the accounts (which had not been proved), the tipping off prohibitions would not have prevented Beyond Bank from explaining to Human Appeal, in general terms, the administrative burden that it faced in complying with its monitoring and reporting obligations, without going into detail about any specific transaction or report.

Beyond Bank terms and conditions

The Court decided that the terms and conditions which permitted Beyond Bank to terminate Human Appeal’s facilities without cause on giving 20 days’ notice did not strike “a fair balance” as required by COBCOP and that the bank would need to modify its terms and conditions.

Key takeaways

The key takeaways from the Human Appeal case are:

A right to close an account without any reason for doing so may be in breach of COBCOP. Customer owned banks should review the account closure provisions in their account terms and conditions to ensure that they are compliant with the principles and requirements set out in COBCOP.
Banks should review their account closure policies and procedures. Banks should act fairly and reasonably when closing an account. Where practicable, customers should be given reasonable notice of account closure and given reasons for why the account is being closed.
If closing an account may have material effect on the customer, a bank may need to take a collaborative approach to assist the customer in making alternative arrangements.
Where an account closure relates to AML/CTF Act compliance, banks must avoid a breach of the tipping off provisions but there may be other ways to explain the account closure without breaching those provisions.

How can we help?

We can assist with reviewing your account closure terms and conditions and your account closure policies and procedures, and advise on the tipping off provisions in the AML/CTF Act.

Kathleen Harris and Patrick Dwyer
Legal Directors

Patrick Dwyer