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De-banking v Good Faith: Doctrinal Assessment of Bank’s Interests when Terminating Payment Account Without Customer’s Consent in the View of EU and Latvian Law

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Abstract

As an element of the author’s suggested “good faith-based approach,“ this paper continues his doctrinal research to assess the conflicting interests of counterparties when banks close accounts unilaterally. It now focuses on the banks’ side and shows that while the bank’s interest in refusing contractual relations with problem customers is to maintain its business profitability, society is interested in ensuring financial inclusion for these customers and preventing money laundering and terrorist financing. This interest includes the ability of a banking system to generate crime-combating intelligence. In this context, the legitimate public interest requires restricting this right of a bank by means to control its enjoyment which may be produced by tools of the good faith tenet being proportional, permissible and the least intrusive measure to strike a fair balance between general and private interests. These restrictions require a bank to seek to maintain account contractual relations with commercially less attractive customers if it can satisfy its obligations under the AML/CTF/sanction regulations. Besides, this examination evinces that such banks’ behaviour is against the principle of pacta sunt servanda and could not be justified by banks’ freedom to conduct business at their discretion. This analysis inherently applies to any national legal system transposing EU rules concerning this issue, but its ground refers to Latvia’s legislation, legal doctrine, and case law. Since these are global trends, it is also useful in other jurisdictions adjusted for the relevant shades of each law frame.

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Notes

  1. For this paper, banks encompass any payment institutions as defined in Articles 1(1) and 4(11) of Directive (EU) 2015/2366.

  2. Dahabshiil v Barclays Bank НС13E04267 and Harada et al. v Barclays Bank HC13E04616 [2013] EWHC 3379 (Ch), para 2.

  3. De Koker et al. (2017, p.136).

  4. Ibid, p.119.

  5. 5 Jelisejevs (2021a, p.622).

  6. Ibid, pp.625–626.

  7. Ibid.

  8. Overzealous account closure is motivated mainly by a risk-based approach introduced by the Financial Action Task Force [FATF] and included in the financial sector regulations of almost all states, including the EU and Latvia. In short, it implies anti-money laundering measures and combating terrorism financing risks to ensure the mitigation of these risks (FATF/OECD 2014, p.6 para 9).

  9. For example, the Australian professor of law Louis de Koker, who specialises in these matters, notes that “de-risking is a situation when the bank may reduce risk by closing accounts while actually increasing the risks for society” (De Koker et al. 2017, p.119). Mārtiņš Kazāks, the president of the Bank of Latvia, has admitted that in many cases, Latvian banks are choosing not to manage risk but to avoid it. “In equivocal situations, it will always be the case - the market is overdone, but this process has gone too far in Latvia” (Kazāks 2020). [All translations from Latvian into English are by the author unless otherwise noted].

  10. Directive 2014/92/EU and Directive (EU) 2015/2366.

  11. Article 55(3) of EU Directive No. 2015/2366 transposed to Latvian national law through Article 67(3) of Latvian Law on Payment Services and Electronic Money.

  12. Article 6(5) of the Latvian Law on Consumer Rights Protection; Vītoliņa (2015, p.101); Judgment of Latvian Supreme Court [2017] C33439211, para 7(2); and others.

  13. Jelisejevs (2021b, pp.153–154).

  14. FATF (2014).

  15. Article 2(1) of Latvian Law on the Financial and Capital Market Commission.

  16. FKTK (2016–2021)

  17. De Koker et al. (2017, pp.135–140).

  18. Jelisejevs (2021b, pp.147–149).

  19. Krons (1937, p.141).

  20. For example, Latvian Supreme Court’s judgments: [2020] SKC-231/2020, para 6.2(7); [2005] SKC-75, para 13(6); [2019] SKC-259/2019, para 7.1(2); [2018] SKC-1782/2018, para 6.5(2); and others.

  21. Krons (1937, p.293); Balodis (2002, p.282).

  22. Balodis (2002, p.283); Latvian Supreme Court’s judgments: [2019] SKC-259/2019, para 7.4(5) and [2017] SKC-363/2017, para 11(2).

  23. Latvian Supreme Court’s judgment [2020] SKC-231/2020, para 6.1(4); Krons (1937, p.300).

  24. Balodis (2007, p.148).

  25. Jelisejevs (2021a, pp.617–634).

  26. Aven and Ors v Orbis Business Intelligence Ltd [2020] EWHC 1812 (QB) QB-2018-006349, para 96.

  27. Allegations of ulterior purposes could be raised even against legal actions of the sovereign states but not only for private business (see, for example, Jafarov v Azerbaijan [2016] ECHR 69,981/14, para 153). The notion of ulterior purpose is related to that of “bad faith,” but they are not necessarily equivalent in each case (Merabishvili v Georgia [2017] ECHR (GC) 72,508/13, para 283).

  28. Navalnyy v Russia [2018] ECHR (GC) 29,580/12 et al., para 165.

  29. See, for example, Lapsa (2020).

  30. Durner and Shetret (2015, p.3).

  31. Kūtris (2020, p.16).

  32. De Koker et al. (2017, p.129).

  33. English and Hammond (2014, p.8).

  34. De Koker et al. (2017, p.119).

  35. World Bank (2015, p.21).

  36. De Koke et al. (2017, p.129).

  37. Ibid p.148.

  38. Ibid.

  39. De Koker and Symington (2014, p.241).

  40. De Koker et al. (2017, p.149); Curry (2016).

  41. Durner et al. 2015, p.9.

  42. Deloitte (2017, p.2).

  43. Hammond and Cowan (2021, p.5).

  44. For instance, the prohibition on maintaining anonymous accounts and accounts with fictitious names (Article 15 of Latvian Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing), the prohibition on cooperating with shell banks and shell arrangements (Articles 21 and 21 − 1 of the same law), the customer’s refusal to provide his or her bank with factual information and documents (Article 28 of the same law), financial and civil legal restrictions against a subject of international or national sanctions (Article 5 of Latvian Law on International Sanctions and National Sanctions), and other cases when unable to ensure the enhanced customer due diligence within the relevant time (para 29 of FKTK Regulation No.5). The last reason should not be confused with a bank “does not want.“ That is, regulations refer solely to the impossibility of fulfilling the requirements to ensure due diligence but not to the bank’s intention to be absent from this obligation.

  45. FATF/OECD (2014, p.6 para 9).

  46. This assertion is illustrated by a study conducted by the British Financial Services Authority in 2011, according to which the banks surveyed appeared willing to maintain what appeared to be unacceptable risks related to the handling of the proceeds of crime if the relationships were profitable (FCA 2011, p.4). Of course, the last decade’s trends have made banks less outspoken, but the core of their respect for operating profitability has remained unchanged.

  47. See, for example, Article 1(2) of Latvian Commercial Law.

  48. “A purpose is an aim or goal or end in view, or the reason why something is done” (Aven & Ors v Orbis Business Intelligence Ltd [2020] EWHC 1812 (QB) QB-2018-006349, para 80).

  49. Balodis (2002, p.280); Latvian Supreme Court’s judgments: [2019] SKC-259/2019, para 7.4(5); [2017] SKC-363/2017, para 11(2).

  50. This “basic and it seems universally accepted principle of contract law” means, in civil law, that promises are binding (Maskow 1992, pp.657–658). “The rule “pacta sunt servanda” is therefore not only a basic legal norm, it is equally as much an ethical rule, that is, a self-evident value” (Verdross 1927, p.286).

  51. Torgāns (2002, p.16).

  52. Riemer (2003, para 5 no.23).

  53. Balodis (2007, p.146).

  54. Acting in good faith, one should establish additional obligations of such content that the parties, aware of the gaps, would agree to under a reasonable assessment of the case circumstances (Brox and Walker 2020, no.80). Mainly, these ancillary duties appear as monitoring and saving cooperation, diligence, and concern for opposing interests, and proper notice (ibid. para 7 no.10; Schulze 2017, para 242 no.2). In the event of grave conflicts, the necessary ancillary duties may be established by a court. Still, without any special agreement, the contractual parties should understand the ancillary responsibilities required to fulfil the particular contract successfully (Balodis 2007, p.145).

  55. Brox and Walker (2020, no.81).

  56. FATF (2012, p.20).

  57. FKTK Regulation No.234 of 23 December 2015.

  58. Balodis (2007, p.144).

  59. Of course, omitting the duty of everyone to refrain from illegal behaviour.

  60. Article 28 of Latvian Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing.

  61. Latvian Constitutional Court stated that “if a person is not engaged in terrorism financing or money laundering, then he is not able to foresee at all what exactly could be doubts and, at the same time, cannot predict what documents and information he would have to submit in order to prevent these doubts” (Latvian Constitutional Court’s judgment [2209] 2008-47-01, para 15.9).

  62. Krons (1937, p.141).

  63. Murray v Express Newspapers plc and Big Pictures (UK) Limited [2007] EWHC 1908 (Ch) IHC168/07 HC05C01669, para 76.

  64. Aktiebolag v Sweden [1989] ECHR 10,873/84, para 53.

  65. Latvian Constitutional Court’s judgment [2014] 2013-21-03, para 10.1.

  66. “Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.”

  67. “Everyone has the right to own property. Property shall not be used contrary to the interests of the public. Property rights may be restricted only in accordance with law. Expropriation of property for public purposes shall be allowed only in exceptional cases on the basis of a specific law and in return for fair compensation.”

  68. Dahabshiil Transfer Services Ltd v Barclays Bank PLC НС13E04267 and Harada Ltd. et al. v Barclays Bank PLC HC13E04616 [2013] EWHC 3379 [GC], para 2.

  69. Particularly, this corresponds with the settled approach of the EU Court of Justice case law (Kadi and Al Barakaat International v Council of the European Union and Commission of the European Communities [2008] ECJ [GC] C-402/05 P, C-415/05 P, para 355).

  70. Nagy v Hungary [2016] ECHR [GC] 53,080/13, para 113; Lekić v Slovenia [2019] ECHR [GC] 36,480/07, para 105.

  71. EU Council/ECHR {2022, p.29 para 138).

  72. Vistiņš and Perepjolkins v Latvia [2012] ECHR [GC] 71,243/01, para 106; R.Sz. v Hungary [2013] ECHR 41,838/11, para 44; Grudić v Serbia [2012] ECHR 31,925/08, para 75.

  73. According to the ECHR case law, the European Convention on Human Rights, including its Protocol No.1, is “a living instrument that must be interpreted in light of present-day conditions and the notions currently prevailing in democratic States” (S.A. Dangeville v France [2002] ECHR 36,677/97, para 47).

  74. See, for example, Article 1(1) of Directive (EU) 2015/849 and Article 2 of Latvian Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing.

  75. Preambular paragraph 42 of Directive (EU) 2015/849.

  76. Article 43 Directive (EU) 2015/849. Similarly, the UK Data Protection Act 2018 recognizes a suspicion of terrorist financing or money laundering as a substantial public interest condition to disclose relevant personal data.

  77. Preambular paragraph 64 of Directive (EU) 2015/849.

  78. Preambular paragraph 22 of Directive (EU) 2015/849.

  79. Durner and Shetret (2015, p.3).

  80. FATF (2014).

  81. FATF/OECD (2014, p.17 para 42).

  82. De Koker et al. (2017, p.127).

  83. UNHCR (2016).

  84. Durner and Shetret (2015, p.19).

  85. Ibid, p.3.

  86. Under Article 63(10 of the EU Treaty [2012/C 326/01], all restrictions on the movement of capital between EU member states and between member states and third countries shall be prohibited.

  87. Craig and de Búrca (2020, p.629).

  88. FATF (2014).

  89. McKendry (2014).

  90. FATF (2014).

  91. Durner and Shetret (2015, p.19).

  92. De Koker (2011, p.361 and p.368).

  93. Durner and Shetret (2015, p.19).

  94. Some examples include OSF (2013) and ICJ (2009).

  95. Durner and Shetret (2015, p.22). One of the latest instances is the Anti-Corruption Foundation (FBK) case, established by the prominent Russian opposition activist Alexei Navalny, imprisoned under Putin’s command. Russian authorities concocted an extensive and invasive criminal investigation into alleged money laundering by FBK staff whose accounts were frozen and then closed by banks to prevent carrying out FBK activities concerning the detection of the top leadership’s corruption (EHRAC 2020).

  96. Durner and Shetret (2015, p.3).

  97. For example, Adam Szubin from US Treasury indicated that “de-risking is problematic. Financial institutions terminate relationships without careful examination of the risks. They do not use available tools to manage them” (Szubin 2016). Board member of the Latvian Financial Industry Association Jānis Brazovskis confirms this trend and argues, “We are at a risk mitigation stage. It is a problem that has already reached Europe. Derisking is not the best that can be applied when working with customers. We should move from a rules-based approach to a risk-based one to manage risks, not just reject them (Brazovskis 2019). Finally, Latvian Prime Minister Krišjānis Kariņš notes that the “Latvian financial sector must start to focus more on risk management rather than avoiding any risks […]. It could be considered that the safest way to avoid a traffic accident is not to get into a car at all, but then you cannot go anywhere. It is better to get in the car and drive with your mind - to observe the speed, look in the mirrors, use the turn signal, and so on. […] We need to stop looking for black money only, […] and we need to start fulfilling the function of development […] I urge that we go to risk management and stop treating everyone as dishonest because it’s just not so” (Kariņš 2020).

  98. Durner and Shetret (2015, p.3).

  99. EU Council/ECHR (2022, p.24 para 108).

  100. Beyeler v Italy [2000] ECHR [GC] 33,202/96, paras 108–114.

  101. ERSA v Ministero delle Politiche Agricole e Forestali [2005] ECJ C-347/03, para 119.

  102. According to Article 40(3) of Latvian Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing, the subject of this law shall not be subject to legal liability for terminating the business relationship with the customer under Article 28(2) of this law, namely, when not obtaining the accurate information necessary for the compliance with the requirements of customer due diligence, only if this subject acts in good faith.

  103. For example, the Latvian Supreme Court adjudicated that the good faith rules reach all civil rights to limit the unjust and formal use of these rights (Latvian Supreme Court’s judgment [2005] SKC-75, para 13(4)). Reputed Latvian sworn lawyer of the interwar period, Mīrons Krons, emphasized that the Supreme Court should inspect a legal issue each time, whether in the viewpoint of good faith the inferior court properly set the limits of a concrete right and correctly determine its content (Krons 1937, p.140).

  104. Latvian legal doctrine has elucidated that the instruction of Latvian Civil Law (Article 1) to enjoy rights and perform duties in good faith is a legally ethical principle that is in force in civil law as a whole. A bona fide tenet must be respected when exercising any subjective right and performing any subjective obligation. “Therefore, following the good faith principle, a person may be denied the enjoyment of subjective rights or the fulfilment of subjective duties” (Balodis 2007, p.141). Latvian court practice also adheres to this approach (see, for example, Latvian Supreme Court’s judgments: [2019] C04169414, para 7.1(2); [2018] C73346818, para 6.2(2); and others).

  105. “The good faith principle applies regardless of whether the legal relationship is based on a law or a legal transaction” (Riemer 2003, para 5). “The good faith tenet is applicable not only to assess a declaration of will and interpret terms of legal transactions but also to specify legal rules according to their meaning and purposes” (Balodis 2002, p.282).

  106. The theoretical legal literature holds an unambiguous opinion that the general principles of law are independent sources of law. They arise from natural law, which exists independently and before the lawmaker, function in the circumstances of a legal state, and serve as an external criterion of legitimacy for written law, that is, for a lawmaker’s activity. Therefore, any action of a lawmaker must be consistent with the general principles of law. This understanding leads to the conclusion that the general principles of law are a priority or prevalent over the legislation created by the lawmaker (see, for example, Rezevska 2005, pp.20–21 and p.60).

  107. Concerning general issues, see Beyeler v Italy [2000] ECHR [GC] 33,202/96, para 107; Ališić and Others v Bosnia and Herzegovina [2014] ECHR [GC] 60,642/08, para 108.

  108. The concept of proportionality appeared initially in German law as a ground for challenging excessive or unnecessary measures in relation to the objective being pursued (Schwarze 2006, pp.685–686). Proportionality is well-established as a general principle of EU law, and it is also featured within other EU states’ legal systems, including Latvian case law.

  109. Craig and de Búrca (2020, p.604).

  110. Of course, the issue of whether a fair balance has been struck becomes relevant only once it has been established that the interference with the bank’s rights served the public interest, satisfied the requirement of lawfulness, and was not arbitrary (Iatridis v Greece [1999] ECHR [GC] 31,107/96, para 58). However, as shown above, there are no such issues when injecting the good faith tenet into the substance and procedure of a bank’s right to terminate account relationships.

  111. EU Council/ECHR (2022, p.31 para 147).

  112. Ibid, para 148.

  113. Balodis (2007, p.141).

  114. Krons (1937, p.271 and p.291).

  115. Roth (2015, p.242).

  116. Preambular paragraph 34 of Directive 2014/92/EU.

  117. Ibid.

  118. Paras 8 and 28 of FKTK Regulations.

  119. Article 33(1) of Directive (EU) 2015/849.

  120. Article 32(1) of Latvian Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing.

  121. See, for example, Article 5(1) of Latvian Law on International Sanctions and National Sanctions.

  122. The applicable legal rules, per se, do not require closing bank accounts of the sanction subjects and the complete termination of contractual relations with them. Of course, imposed restrictions may include denying access by the subject of sanctions to financial resources (instruments) and prohibiting the provision of specified financial services. However, the sanction restrictions do not prevent crediting the frozen account with funds that, of course, should also be frozen (Article 7(1) of Regulation (EU) No 269/2014).

  123. According to the ECHR case law, one of the significant factors for the balancing test under Article 1 of Protocol No. 1 is whether the person attempted to take advantage of a weakness or a loophole in the system (National & Provincial Building Society et al. v United Kingdom [1997] ECHR 117/1996/736/933–935, para 109).

  124. “There will normally be three stages in a proportionality inquiry: whether the measure was suitable to achieve the desired end; whether it was necessary to achieve the desired end; and whether the measure imposed a burden on the individual that was excessive in relation to the objective sought to be achieved (proportionality stricto sensu)” (Craig and de Búrca 2020, p.604). See also Latvian Constitutional Court’s judgment [2010] 2010-38-01, para 11).

  125. One of the features of the fair balance test is whether other, less intrusive measures existed that could reasonably have been resorted to by the public authorities in the pursuance of the public interest. It may also be relevant whether it would have been possible to achieve the same objective by less invasive interference with the applicant’s rights and whether the authorities examined the possibility of applying these less intrusive solutions (Yukos v Russia [2014] ECHR 14,902/04, paras 651–654).

  126. One of the elements of safeguarding the rights of payment service users was the introduction of a payment account with basic features that allow consumers to perform essential operations, such as receiving their salaries and making payments (preambular paragraph 35 of Directive 2014/92/EU, transposed into Latvian Law on Payment Services and Electronic Money via the Law of 2 March 2017). Of course, in specific circumstances, banks may terminate this account. It does, however, require an infringement by the customer. Increased due diligence costs will not be a sufficient reason to close that account (Ibid. preambular paragraph 47). Nevertheless, this legal tool cannot be considered exhaustive. It should not exclude other legal protection against unfair actions of payment service providers (Jelisejevs 2021a, pp.621–622).

  127. In cases where interference did not consist of expropriation, the ECHR also examines whether the interference was prohibitive or oppressive (Stefanov v Bulgaria [2015] ECHR 35,399/05, para 67).

  128. Schulze (2017, p.220).

  129. Riemer (2003, § 5, Rn.7).

  130. Kull (2004, p.38).

  131. Vakfı v Turkey [2007] ECHR 34,478/97, para 46.

  132. Megadat.com SRL v Moldova [2008] ECHR 21,151/04, para 74.

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    Aleksejs Jelisejevs

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Jelisejevs, A. De-banking v Good Faith: Doctrinal Assessment of Bank’s Interests when Terminating Payment Account Without Customer’s Consent in the View of EU and Latvian Law. Liverpool Law Rev 44, 183–204 (2023). https://doi.org/10.1007/s10991-023-09324-y

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