De-banking: the legal issues

De-banking is a term that describes a bank’s decision to decline to offer, or continue to provide, a banking service. It is a decision that can have a significant impact on the person or entity that has been de-banked and, as such, is an issue which lies at the intersection of financial institutions’ commercial interests and social responsibilities.

The issue is global, in many cases driven by Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) laws, and reputational considerations. The Government and regulators acknowledge the risk that a blanket policy of de-banking legitimate businesses in particular sectors may produce the undesirable result of forcing those enterprises to conduct their operations in cash or otherwise outside the formal economy. Balancing these societal considerations with banks’ status as commercial enterprises, which must manage their own risks and resources, has to date been the focus of the regulatory response to de-banking.[1]

The recent decision of the Supreme Court of New South Wales in Human Appeal International Australia v Beyond Bank Australia Ltd[2] (Human Appeal) explored some important legal issues associated with de-banking, which, expectedly, derive from the law of contract. The analysis below examines those legal considerations and their impact on financial institutions’ approach to the issue, particularly where AML/CTF considerations are present.

Background

Human Appeal International Australia (HAIA) is a company limited by guarantee which operates as a charity focused on the Muslim community in Australia. It banked with Beyond Bank Australia Ltd (Beyond Bank), a mutual bank.

HAIA became a member of Beyond Bank in March 2021. In August 2021, at which time HAIA held deposits totaling $6.1 million, the bank communicated to HAIA that it was closing its accounts, without giving reasons for doing so.

HAIA commenced proceedings asserting that Beyond Bank was not entitled to close its accounts. It did so on two bases. The first was that the way the bank did so was contrary to the banks’ duties of cooperation and good faith. The second was that, to the extent that the terms and conditions that applied to HAIA’s facilities with Beyond Bank permitted it to de-bank HAIA without justification or reasons, those terms did not conform to the bank’s obligations under the Customer Owned Banking Code of Practice (the COBCOP).

Reasons for termination

Beyond Bank’s terms and conditions purported to give it the right to close an account at any time upon the giving of 20 days’ notice. The terms expressly provided that it was not necessary to give reasons. But this was not the end of the matter.

Both parties accepted that Beyond Bank’s right to exercise contractual powers, in this case the power to terminate the contract, was constrained by the requirement that it act reasonably and in good faith. Such a constraint has historically been said to derive from the implication of a term to that effect, or from its status as an inherent feature of a contract.

In this case it was not necessary, however, to consider the content or operation of an implied term of good faith and reasonableness. That was because of the analogous content of the obligations of fair and ethical dealing that arose by the operation of the COBCOP,[3] which Beyond Bank incorporated into the terms and conditions of is contract with HAIA.

As it was ultimately conceded by Beyond Bank that it was (contrary to its terms and conditions) obliged to have a reason for closing an account, it was not necessary to explore in detail the source of that obligation.

No admissible evidence of Beyond Bank’s reasons was led for two reasons. First, Beyond Bank initially relied on its terms and conditions (which explicitly eschewed the giving of reasons for a termination). Secondly, Beyond Bank submitted that the intimated existence of AML/CTF reasons was not capable of augmentation by admissible evidence, because of the secrecy obligations contained in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act).

In his Honour’s reasons, Parker J carefully surveyed the provisions of AML/CTF Act concerning financial institutions’ reporting obligations and, in particular, the tipping-off provisions and their impact on court proceedings. The fact that s 123(10) specifically provides that (except for the purposes of AML/CTF proceedings) reporting entities are not required to disclose reporting matters to a court was referred to. So too was s 134, which forbids the production of a document containing reporting information to a court. Beyond Bank submitted that the breadth of these provisions was an insuperable obstacle to the giving of reasons, the production of documents in relation to those reasons, or even adverting to the existence of documents that, but for the operation of the AML/CTF Act, might have been disclosed in the proceedings.

However, a difficulty for Beyond Bank was that it submitted that the decision to terminate was due to the administrative burden of monitoring Beyond Bank’s accounts. Not only did Parker J doubt that disclosing this reason, or documents relevant to it, was unlikely to be caught by the AML/CTF Act secrecy provisions, but the absence of any admissible evidence precluded his Honour from relying on it.

Moreover, there was no evidence that Beyond Bank had sought (from the Australian Transaction Reports and Analysis Centre CEO) any conditional exemption from the secrecy provisions, available under s 248 of the AML/CTF Act, for the purposes of its conduct of the proceedings. The fact that such a request was made and refused in another case[4] was found not to be relevant.

The lacuna in Beyond Bank’s evidence which arose as a result of the above matters compelled Parker J to conclude that Beyond Bank did not in fact have any legitimate reason to terminate HAIA’s accounts. On that basis, the termination was found to be invalid.

Striking a fair balance

The further argument advanced by HAIA in reliance on Beyond Bank’s COBCOP obligations focused on Beyond Bank’s promise, given by cl 4.2 of the COBCOP,[5] that its terms and conditions strike a fair balance between Beyond Bank’s and HAIA’s respective interests. This provision was found to require Beyond Bank to revise its terms and conditions to the extent that they did not strike a fair balance.[6]

In the context of a decision to de-bank, Parker J found that while the need for a valid reason went some of the way to striking a fair balance, the value of this obligation was diminished where “the customer has no practical means of finding out the reason for the decision, and challenging it, short of launching legal proceedings”.[7] His Honour went on to observe:

Such a state of affairs seems to me to be highly un-businesslike. The contractual duty of good faith and fair dealing is closely linked with the contractual duty of cooperation. A cooperative approach to a problem which was causing the Bank to think that it might wish to terminate the customer’s account, would be to raise the issue with the customer (to the extent, of course, that this is lawfully possible), so that it may be dealt with in advance. It seems quite illogical, having conceded that a reason must exist, to put the customer in the position where the reason can only be identified once the purported termination has taken place, and the customer has brought legal proceedings about it.[8]

His Honour accepted the impact of the secrecy obligations under the AML/CTF Act, and that “[c]learly, any obligation to give reasons must be limited to the reasons the Bank may lawfully disclose”.[9] However, that obstacle was found not to be present in Human Appeal because Beyond Bank’s reason for termination was the administrative burden of AML/CTF compliance generally in respect of the accounts, rather than a particular reportability matter.

Conclusion

The decision in Human Appeal makes clear that, where lawfully permitted to do so, reasons must be given in advance of a decision to de-bank a customer. Some important questions, however, remain.

What of the situation where a decision to de-bank is due to a reportability matter? Clearly enough, a financial institution is not obliged to give reasons in this case. But, there are few (if any) bases other than AML/CTF secrecy obligations to lawfully resist the giving of reasons. Does it then follow that a failure to give reasons is “information from which it could be reasonably inferred” that a reportability matter exists for the purposes of s 123 of the AML/CTF Act?

Moreover, the analysis of the intersection between rules of civil procedure and the AML/CTF Act in Human Appeal highlights the difficult path that must be carefully navigated by financial institutions to properly prepare their case when de-banking customers seek, via court proceedings, to discover the reasons for de-banking, where those reasons concern a reportability matter.

The regulatory response to de-banking will likely continue to evolve as a greater volume of reliable data on the prevalence of the practice is marshalled.[10] The legal issues discussed above, particularly vis-à-vis AML/CTF Act compliance, will no doubt remain an important consideration that guides banks’ and regulators’ approach to the issue.