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BANK COMPELLED TO SERVE HIGH RISK CUSTOMERS

bank compelled - CopyOur portal editor, Jonathan Fisher QC, explores the potential implications of a recent High Court decision when an injunction was issued to force Barclays Bank to provide banking services to three high risk money service businesses.

SPEED READ

A clearing bank is forced by Court order to provide banking services to three money service businesses, notwithstanding its assessment that the business is high risk in terms of money laundering and the bank’s desire to withdraw such services. The decision raises some important points about interaction between the anti-money laundering compliance regime and the ability of banks to make commercial decisions about the customers with whom it chooses to trade.

COMMENTARY

It has always been assumed that should a bank consider a prospective customer too high risk that it is fully within its rights to refuse to provide such customers with services. However, the recent decision in Dahabshiil Transfer Services Limited v Barclays Bank plc [2013] EWHC 3379 (Ch) brings this assumption may not be correct in all cases. The case involved the application for interim injunctions to restrain Barclays Bank from terminating the provision of banking services to the claimants. The claimants are all members of the money service business (MSB) sector. The claimants argued that the withdrawal of services was an abuse of its dominant position in the UK’s MSB market and sought interim relief pending a final determination on the merits.

In 2012, Barclays launched an internal review of their MSB banking service sector. The review was prompted by HSBC’s withdrawal from the MSB market following a US Senate report which was heavily critical of HSBC's money laundering controls and culminated in a settlement with the US authorities for $1.9 billion. As a result of Barclays’ review, the bank decided to strategically tighten the criteria and risk framework surrounding their exposure in the sector. In consequence, Barclays decided that it would only provide services to MSBs which operated on a sufficiently large scale and had the ability to implement and monitor robust system controls. The bank decided to terminate their relationship with high risk customers who did not fall into this category. Ultimately, the review led to Barclays reducing its MSB customers by approximately 62%. The claimants did not meet Barclays’ new criteria and the bank informed them of this fact in May 2013.

The claimants argued that due to Barclays’ dominant position in the MSB banking services market, and the claimants’ inability to find replacement equivalent services, Barclays had acted wrongfully and in breach of competition laws set out in Article 102 of the Treaty Founding the European Union and section 18 of the Competition Act 1998.

In deciding whether to grant the injunction, Mr Justice Henderson highlighted the money laundering risks associated with the MSB sector, explicitly recognising that the MSB sector is high risk and subject to regulation in many jurisdictions. In the UK, the sector is regulated by the Money Laundering Regulations 2007, with HM Revenue & Customs acting as the designated supervisory authority. In evidence, one of the claimants acknowledged the high risk nature of the MSB business. As Barclays explained, there were three specific risks associated with money remittance businesses. First, money received by remitters are generally received in bulk and then transferred to overseas banks or partners, with a consequential lack of visibility of the source of the funds or their ultimate destination. Secondly, even where the identities of the transferor and transferee are known, there is frequent inability to trace the ultimate destination, particularly when money is transferred via the “Hawala” system. Thirdly, there is an associated difficulty for Barclays in carrying out effective screening of bulk transfers.

However, the Judge having concluded there was a triable issue as to whether Barclays had a dominant position in the UK MSB market, the High Court proceeded to grant an interim injunction requiring the bank to continue providing banking services to the claimants pending a full hearing of the case. The Court pointed out that the effect of the injunction was to require Barclays to do no more than continue to provide banking services to established customers with impeccable records.

A number of aspects of this decision are concerning.

First, the decision demonstrates the High Court’s willingness to interfere in what is essentially a private law transaction by compelling a party to continue to provide a commercial service in circumstances where the service provider does not wish to run an enhanced risk of becoming embroiled in criminal conduct. Although Barclays could protect itself by filing suspicious activity reports under Part 7 of the Proceeds of Crime Act 2002, the bank is nevertheless being required to run anti-money laundering risks it does not wish to run, and in consequence may be forced to deal with the serious consequences it was seeking to avoid in the first place.

Secondly, the decision serves as a warning to unsuspecting third parties who may draw comfort from the fact that a major clearing bank is providing services to a customer without appreciating that the bank is being forced to do so. The case demonstrates once again that holding an account with a major clearing bank cannot be considered a sign that the monies have been legitimately sourced, without further enquiries being made.

Finally, the grant of an interim injunction seems counterintuitive since, if Barclays does indeed have a dominant position, the bank should not be held to be taking advantage of this dominance by seeking to withdraw from the provision of banking services.

Image credit: Flickr

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The views expressed in this article represent those of the author and not Bright Line Law.

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