N v S: How effective is your de-risking strategy?
Banking practitioners will be aware of the court's historical reluctance to grant mandatory injunctions and interim declarations where a bank terminates its contractual relationship with a money-service business, (as its customer), in the context of managing money-laundering risk. However, in the landmark decision of N v S (2015), the judge proceeded to grant interim mandatory relief to the claimant, a regulated payment service provider.
Risks of "de-risking"
In response to Anti-Money Laundering (AML) becoming an increasing priority, regulators and prosecutors have widely-publicised the risks money launderers pose to the integrity of banks. In response, banks have embarked upon programmes of de-risking.
Following this practice, regulators have expressed concern over banks' money-laundering risk management, namely that banks are de-risking by exiting certain relationships, products, markets, and jurisdictions to reduce their exposure to risk. This has generated some difficult issues regarding the rationale behind banks' de-risking decisions.
The decision of N v S (2015) illustrates the court's willingness to grant an injunction against a bank where it does not consider its money-laundering risk management to be effective.
N v S: A landmark decision
On the facts of the case, N was a regulated payment service provider whose entire banking facilities had been frozen by its bank. N applied for a mandatory injunction that certain transactions be carried out and an interim declaration that there would not be any breach by the bank of the primary money laundering provisions of Proceeds of the Crime Act 2002 (POCA) in doing so.
In contrast to previous applications, the judge did not refuse to grant relief, but decided to grant interim mandatory relief. This required the bank to execute the transactions, supported by an interim declaration to protect the bank from criminal liability.
Banking practitioners will be aware that historically the courts have been reluctant to grant mandatory injunctions and interim declarations in these circumstances. Notably, however, the judge did seem influenced by the exceptional facts of this case: a delay of 42 days in allowing the POCA consent regime to run its course would cause serious damage to the claimant's business and innocent third parties.
Managing risks effectively
The Financial Conduct Authority (FCA) highlighted that the sectors most affected by banks' de-risking measures are of money transmitters, charities and FinTech companies. It is an expectation of the FCA that banks recognise that the risk associated with different business relationships varies and to manage these appropriately.
Paragraph 4.40 of the Joint Money Laundering Steering Group's guidance provides a useful summary of best practice in this context:
"Firms should not… judge the level of risk solely on the nature of the customer or the product. Where, in a particular customer/product combination, either or both the customer and the product are considered to carry a higher risk of money laundering or terrorist financing, the overall risk of the customer should be considered carefully."
In light of the above, banking practitioners have found themselves in a dilemma: on the one hand, banks are encouraged to reduce exposure to risk and, on the other hand, banks are expected to engage with clients in certain high-risk sectors or jurisdictions. The decisions taken can have a serious impact on other regulated businesses which handle client money and have the potential to shut them down, pushing them into crisis management mode.