Litigation on the termination of bank accounts due to compliance issues or strategic reorientation has become more prevalent in recent years. However, there has also recently been a trend in the opposite direction, where banks' refusal to open bank accounts has led companies to initiate legal proceedings against them.
The termination of bank accounts is a phenomenon that did not exist until a few years ago. This has now changed. Spurred on by high fines and invasive investigations by the Public Prosecutor and the Dutch Central Bank, banks are now busy with far-reaching measures regarding know-your-customer and client due diligence investigations, particularly ones aimed at countering money laundering. An ultimate measure could be to close the current accounts of companies that are suspected of laundering money or that provide insufficient information for or fail to cooperate with a bank's investigation. Banks also often indicate that the sector in which a particular client is active no longer matches their risk appetite, or that the client's profile no longer matches this risk appetite due to a strategic reorientation.
Banks are generally contractually authorised to close bank accounts without any default being present. This has far-reaching consequences for individual clients, especially clients which do not have an account with another bank. Without a bank account, it is impossible to participate in economic transactions. Therefore, the case law dictates that banks cannot always use their authority to close bank accounts.
The most recent development in this matter is companies which have been denied bank accounts from the offset initiating legal proceedings against the relevant bank, requesting the courts to order it to open bank accounts.
This article provides an overview of recent litigation concerning both the termination and opening of bank accounts.
Over the past decade, a legal framework has developed in the case law in the context of the termination of credit agreements – in particular, overdraft facilities – which can serve as a general framework for terminating banking relationships, including bank accounts. This framework was set out in the Supreme Court's landmark ruling in a case that an individual client raised against ING.(1) In short, the Supreme Court ruled that if a bank uses its authority to terminate a credit agreement, the legal validity of that termination must be assessed on the basis of the agreement and the standard of Section 6:248(2) of the Civil Code. The latter implies that termination by a bank based on 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 that the bank has towards its clients on the basis of the General Banking Conditions.
It is generally assumed that the aforementioned legal framework applies mutatis mutandis to the termination of bank accounts, even if no credit facility is in place. However, this framework is supplemented by the fact that the use of a bank account is of vital importance to participating in economic transactions. This will bear weight in the reasonableness and fairness test. On the other hand, the client of a bank must answer reasonable information requests by the bank, including based on 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;
- subservient to criminal offences; or
- harmful to the bank or its reputation or to the integrity of the financial system.
Most of the cases relating to the termination or opening of bank accounts will be brought before the court in summary proceedings. These are the fastest legal proceedings in the Netherlands.
These proceedings start with a writ of summons that has been shared in draft form with the court. Based on the writ of summons, the court will set a date for the hearing, normally within six weeks of the draft having been submitted. The defendant has no obligation to file a written statement of defence prior to the hearing – however, it is permitted.
The hearing itself is quite informal. Normally, both parties can present their cases before the judge. The judge is free to ask questions. After the hearing is closed, the judge will render a ruling within 14 days.
Summary proceedings are, by their nature, inconclusive. They cannot definitively settle disputes; all decisions in summary proceedings are strictly provisional and, in principle, revocable in main proceedings on the merits. In practice, the consequences of summary proceedings are usually final in nature because parties decide not to pursue main proceedings.
Summary proceedings are possible only if the claimant has an urgent interest. In the cases discussed below, there was an urgent interest as they concern the termination of bank accounts and the claimants risked being cut off from the financial system.
Case law on terminating bank accounts Bitcoin
There are two court cases where a bank closed the accounts of clients active in the trade of bitcoin. In both cases, the court found it important that the trade in bitcoin is regarded as a particularly risky activity. Further, the purchases were made almost exclusively by cash payments and the bank clients had barely investigated the origin of the money or provided the bank with convincing evidence that the fund flows were legitimate. In both cases, the court ruled that the termination was valid.
Sectors connected with more risk
There is numerous case law regarding the termination of clients operating in sectors such as gambling, adult entertainment and coffee, where it is common knowledge that more risks are connected with the flow of funds. In these sectors, cash money is also more common, which makes it even more risky for banks. Banks are generally allowed to close bank accounts with clients active in these sectors, especially because, in most cases, the clients in question neglected to inform the bank about their activities.
Insufficient cooperation or dubious business practices
In some cases, termination is based on the client's insufficient cooperation with the bank's investigation without any concrete suspicions of money laundering. In most cases, this concerns ultimate beneficial owner-related issues or dubious commercial practices that could endanger the bank's reputation and integrity.
Trust offices
Throughout the market there have been terminations based upon a generic policy change regarding trust offices and the companies that they manage, in view of potential reputational damage and the increased costs of the know-your-customer investigations. There were no (concrete) suspicions of money laundering and no other Act on Financial Subversion or the Money Laundering and Terrorist Financing (Prevention)-related problems. Nevertheless, some courts ruled that the terminations on that basis were valid, while obeying a notice period of six to 12 months (commencing after the date of rulings) for the managed companies and two years for the trust office. However, a bank was recently ordered to continue the relationship, at least pending more extensive main proceedings.
Case law on opening bank accounts
At the time of writing, there appeared to be four cases where a (potential) customer had initiated summary proceedings against a bank to open accounts. The court ordered the bank to open an account in two of the rulings and rejected the request in the other two.
The legal framework is a bit different, but ultimately the judge performs the same balancing of interests. With regard to business customers, the contracting obligation is linked to banks' special duty of care. Under certain circumstances, the social function of banks entails a special duty of care towards third parties whose interests they should consider on the basis of what is appropriate in society under unwritten law.(2) In his recent conclusion(3) in the appeal of cassation brought by a bank that had been ordered to open accounts, the advocate general discussed the special duty of care in relation to the contracting duty. In his view, a bank should open accounts if its failure to enter into a contractual relationship with a third party is contrary to what is normal in society according to unwritten law. This would be the case if the (special) circumstances of the case entail that the bank's interest in being able to choose with whom it enters into a contractual relationship must give way to the third party's greater interest. It will be interesting to see whether the Supreme Court agrees with this conclusion. If so, litigation on the opening of bank accounts will likely continue to increase.
The enormous efforts and costs arising from banks' gatekeeper function are a serious problem for not only the banks, but also their clients. Banks are, understandably, already reluctant to facilitate a bank account for clients which has placed its management with a trust office. The same applies for new customers whose only misdemeanour is 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 there are no concerns regarding this kind of client in practice 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 may be a group of companies that is unduly 'unbankable'. Paradoxically, this could lead to such companies being forced to work more with cash, thus increasing the risk for society.
Based upon the available case law, the following rule of thumb seems to be justified.
The termination of a banking relationship for general reasons, such as the classification of an existing customer as higher risk, will generally be unacceptable due to a violation of reasonableness and fairness if the termination will deprive the customer of access to the financial system. However, this is not necessarily justifiable. In that situation, the bank in question eventually opted to enter into a relationship with that party, in which case the bank can be expected to continue to service that customer, partly in view of its social function, so that the customer retains access to the financial system. However, there should arguably be room to charge that customer higher compliance costs. On the other hand, a termination on general reasons will often be justifiable if the customer in question also banks with another bank.
A termination will usually be justifiable if there are concrete circumstances giving rise to a need to do so, particularly Money Laundering and Terrorist Financing (Prevention) Act issues, even if the customer loses access to the financial system as a result. In those circumstances, extra care may be required from the bank. Therefore, for customers of banks that operate in sectors which involve a higher risk, it is wise to comply fully and transparently with information requests from banks. In practice, this can be annoying or appear suspicious; however, being deprived of a bank account is a risk that no company can take.
There is insufficient case law available to distil a rule of thumb regarding proceedings with the intention of opening bank accounts. The Supreme Court will render a ruling on this topic shortly. If the Supreme Court follows the advocate general's advice, numerous companies are likely to seek court orders to open bank accounts.
Endnotes
(1) The ING/De Keijzer ruling. Available here (in Dutch).
