Member Article

Bank Accounts were reinstated after Bank failed to give justified reasons for termination under AML/CFT obligations.

1. Facts of the Case

APS Bank p.l.c. (hereinafter ‘the Bank’) had informed a customer (hereunder ‘the Appellant’) that, after the Bank’s internal policies and procedures were revised, the Bank was no longer in a position to provide banking services to her and, that consequently, their contractual relationship was being terminated.

The Appellant lodged a complaint before the Arbiter for Financial Services in Malta (hereunder ‘the Arbiter’) claiming that the Bank had terminated the banking relationship unfairly, without a valid reason and contrary to general banking practices and that this had also given rise to damages. The Appellant also requested the Arbiter to, inter alia, order the Bank to reinstate her bank accounts and banking services previously provided by the Bank. The Bank replied that its decision was indeed justified and was based on its customer due diligence requirements, particularly since the Appellant had failed to co-operate with the Bank, failed to provide the necessary information/documentation, and when it was eventually provided, the said information/documentation was incomplete.

2. The Arbiter’s Considerations and its Decision (decision dated 4 July 2023)

The Arbiter held that the information requested by the Bank was in line with the applicable customer due diligence obligations and referred to article 19 (3) (c) of the Arbiter for Financial Services Act (Chapter 555 of the Laws of Malta) which governs the functions of the Arbiter, and provides that, in carrying out the functions, the Arbiter shall (inter alia):

“consider and have due regard, in such manner and to such an  extent  as  he  deems  appropriate,  to  applicable  and relevant laws, rules and regulations, in particular those governing the conduct of a service provider, including guidelines  issued  by  national  and  European  Union supervisory  authorities, good  industry  practice  and reasonable and legitimate expectations of consumers and this with reference to the time when it is alleged that the facts giving rise to the complaints occurred…” [emphasis added as per Arbiter’s considerations]

 Referring to a previous decision of the Arbiter, the Arbiter reiterated that a banking relationship between customer and a credit institution should be based on the following principles:

• Fairness;
• Equity;
• Reasonableness;
• Integrity;
• Good Faith;
• Reliability; and
• Clear and Effective Communication.

The Arbiter emphasised, with reference to previous decisions, that today consumers and traders depend on having bank accounts for their operations. The Arbiter noted that the Bank should only close the accounts of a client where all other means were duly exhausted. The Arbiter also emphasised the importance of continuous communication with clients and that Banks ought to guide customers whenever they are in default. The Arbiter declared that it is not within his remit to perform any due diligence during its proceedings, but rather to ascertain whether prima facie there were sufficient indications to justify a Bank’s decision to terminate the business relationship.

The Arbiter also emphasised that the customer was obliged to provide information/documentation to the Bank in view of the on-going due diligence requirements of the Bank, and that the Bank should demand information/documentation to the extent necessary to satisfy the applicable regulatory requirements ensuring transparency and proportionality in such requests.

After examining the information/documentation requested by the Bank, the Arbiter decided that the requests of the Bank were justified and rejected the Appellant’s claims.

3. The Court of Appeal (Inferior Jurisdiction) overruled the Arbiter’s Decision (decision dated 3 April 2024)

The Appellant felt aggrieved by the Arbiter’s decision and filed an appeal before the Court of Appeal (Inferior Jurisdiction) (hereunder ‘the Court’), arguing, inter alia, that the Arbiter did not consider the evidence and had, instead, based its decision on the timeline provided by the Bank. The Appellant argued that the documentation/information requested by the Bank was provided in due time, and that when the Bank alleged that the information/documentation was not provided, it failed to specify exactly which information/documentation was missing. The Appellant also argued that there were various requests from the Bank’s personnel that contradicted each other and explained that in relation to the source of funds information, the Bank was already in possession of information from past transactions.

The Appellant also argued that when she had requested the Bank (through her lawyer) to indicate what documentation/information was missing, the Bank provided a general reply that documentation/information was insufficient. In relation to an argument put forward by the Bank that the Appellant’s business model does not provide the “necessary structures for the Bank to fulfil its obligations to identify and independently verify ownership, source of wealth and source of funds”, the Appellant argued that the Bank could have increased its compliance fees before deciding abruptly to close her accounts. The Appellant also claimed that it was the Bank that had directed her as to how to open the relative accounts and that she had various meetings with the Bank’s personnel in order to structure matters in a manner that she believed was satisfactory to the Bank. The Appellant also argued that the fact that the Bank had written that the accounts were ‘Closed by Bank’ had affected her reputation when applying to open accounts with other banks, as well as in any invitations to a tender that she participated in.

The Court examined the correspondence between the parties in detail and noted that the Appellant had provided the required information/documentation to the Bank.  It noted that the Bank had first informed the Appellant that an assessment was being undertaken and left the Appellant without a definite reply for a prolonged period. Subsequently, after reviewing the documents, the Bank informed the Appellant that these were not sufficient to satisfy the Bank’s regulatory requirements.

The Court disagreed that the reasons provided to the Appellant were sufficient to terminate a business relationship with a client, and that the reasons provided by the Bank were not clear, leaving the client in an uncertain position. The Court also emphasised the importance of the Bank informing the client as to why the client may have been in default, and of the client being given the opportunity to remedy any shortcomings. The Bank also had to provide a justified reason for terminating the business relationship and in this case, it had failed to do so. The Court also commented on the fact that it did not seem that the Appellant was involved in any money laundering and that if the Bank was not comfortable with the business model of the Appellant’s company, it should have informed her from the beginning.

The Court overturned the decision of the Arbiter, upheld the claim of the Appellant for the Bank to reinstate her bank accounts and held that the Appellant should be given the opportunity to provide the necessary information/documentation as requested by the Bank. The Court also ordered the Bank to pay the appellant €1,000 by way of compensation.

The full Court of Appeal (Inferior Jurisdiction) judgment in the Maltese language decided on 3 April 2024 may be accessed here: https://ecourts.gov.mt/onlineservices/Judgements/Details?JudgementId=0&CaseJudgementId=145364

This document does not purport to give legal, financial or tax advice. Should you require further information or legal assistance, please do not hesitate to contact Dr Michael Psaila or Dr Sarah Zerafa Lewis.

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