Guarding against money laundering risks

Posted: 13th August 2019

Money launderingDistinguishing between legitimate clients and money launderers is a major on-going challenge for many businesses but, as this High Court case proves, they ultimately bear legal responsibility for doing so.

In this case, a company was almost put out of business after its bank formed the view that its crime prevention precautions were not up to the expected standard.

The company provided foreign exchange and payment services to its clients and had about 60 active accounts with the same bank, through which about £700 million passed annually.

After the bank froze a number of those accounts, they went on to ultimately terminate the banking relationship, the company launched proceedings, seeking very substantial damages for alleged negligence and breach of contract.

In rejecting those claims, however, the Court found on the evidence that, during a two-year period, the company had no adequate systems in place to ensure that its services were not used by money launderers. It subsequently took steps to improve its controls, but the bank nevertheless took the view that there were dozens of red flags on the company’s accounts and that it was banking the criminal proceeds of no fewer than nine so-called boiler room frauds.

The company argued that, if proceeds of crime had passed through its accounts, that had resulted from inadvertence and there was no suspicion that it was complicit in money laundering. However, the Court noted that deliberate wrongdoing and a poor control environment can have precisely the same effect. The bank was unable to countenance the risk that it might be indirectly involved in money laundering and was of the opinion that matters were so far gone that terminating its banking relationship with the company was the only viable option.

Although the bank’s decision had grave financial and reputational consequences for the company, the Court found that it was an honest and rational response to the company’s failure to be better prepared against money laundering at the relevant time. The bank had a contractual right to terminate the banking relationship without notice in exceptional circumstances and it had acted proportionately in doing so.