Refusing a client because of its business - not so fast

Blog

Refusing a client because of its business? Not so fast! 

The law vs. the special Duty of Care. How to act as a bank?

Nowadays, banks find themselves in a difficult position. Various banks are fined for not (fully) complying with laws and regulations and are also heavily scrutinized, publicly and politically. As a result banks tend to resort to a ‘better-safe-than-sorry approach’ focused on strict adherence to laws. On the other side banks have a duty of care towards the public to provide bank accounts.

Ruben Verschuren - 15th January 2020

Background

Financial institutions struggle with client acceptance and find themselves in a limbo. Regulatory requirements impose financial institutions to combat anti-money laundering [1] and act as a gatekeeper for the financial sector [2]. To meet these obligations, banks are becoming more risk averse in accepting clients that are active in a ‘potentially sensitive’ sector. On the other hand a bank account is crucial when starting a business. The (special) duty of care requires banks to grant bank accounts to the public given their pivotal role in society. The Dutch regulator recognizes this tension field but fails to provide an adequate solution [3] .

In a recent case [4], a bank rejected the request to open a bank account for a company (name of the company: “Project C”) that wished to participate in an governmental introduced experiment. The goal of the experiment was to regulate and minimize the illegal production of cannabis. Having a bank account was a condition to become part of this experiment. The bank based its rejection on the opinion that granting a bank account to Project C increased the (potential) risk of money laundering given its line of business and used the argument of the freedom of contract: being able to enter into an agreement with whomever a party desires. Is it however (legally) justified to reject a client solely on the ground of a ‘potentially sensitive’ line of business? 

The outcome

The judge decided that freedom of contract is not sufficient reason for rejecting the request to open a bank account. Nowadays, having a bank account is one of the elements for a company to conduct business and participate in society. Furthermore, due to the governmental nature of the experiment, transparency (and thus having a bank account to prove all incoming and outgoing transactions) was essential. Freedom of contract therefore does not exist in its full extent for a (commercial) financial institution given the important role of a bank in today’s society. In this case, there were no indications that gave rise to any suspicion of money laundering. Adding the fact that the experiment was introduced to minimize the risks of (illegal) cannabis production the judge decided to rule in favor of Project C: a bank account had to be opened. The judge added that refusing to open a bank account can impede business and may only occur after individual assessment of the business, company and careful  consideration.

 

What financial institutions consider a ‘sensitive’ line of business is up to their own imagination and risk appetite but should not be limited to drugs related  business. Sensitive business lines can also involve the gambling industry, adult entertainment or cryptocurrencies for that matter. The increased regulatory framework requires banks to innovate, one way of doing that is trying to make client acceptance procedures more cost efficient by using technology-driven systems. These systems may be based on artificial intelligence. The question is whether or not artificial intelligence has come far enough to deal with the complexity of facts and circumstances required to assess clients business versus the duty of care of banks. Time will tell. 

Need help or want to find out more?

Times are changing. Principle-based obligations impose challenges in your daily operations, whereas a black and white approach (albeit on artificial intelligence basis) may be tempting as it gives a higher level of certainty it is usually not justified. The above case proves that such an approach is not the way forward in today’s increasing and complex (regulatory) environment whereby there is room for different shades of gray and interpretation.

Our financial law and supervision team has extensive knowledge and experience with (positive) compliance and meeting regulatory requirements. Deloitte Legal uses a multidisciplinary and technology-driven approach to create business opportunities out of your legal challenges. In case you would like to know more about the (special) duty of care for banks, technology-driven compliance and/or any other regulatory topic, please feel free to reach out. 

Did you find this useful?