Human Appeal v Beyond Bank: tipping off, debanking and managing Money Laundering/Terrorism Financing risk

A recent decision by the New South Wales Supreme Court illustrates some of the complexities that can arise for reporting entities when seeking to adhere to regulatory expectations and managing their risk in an AML/CTF context.

In Human Appeal International Australia v Beyond Bank Australia Ltd (No 2) [2023] NSWSC 1161, a banking customer had its account facilities closed unilaterally without being provided with reasons for the bank’s decision. The customer took action against the bank, claiming that it could only be debanked on reasonable grounds and that those grounds had not been established. The Court essentially agreed with the customer.

There was some suggestion in the judgment that the bank may have felt unable to explain its decision due to the ‘tipping off’ provisions in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the AML/CTF Act): see ss 123 and 124 of the AML/CTF Act. Those provisions essentially constrain reporting entities from communicating information to third parties from which it is either clear, or could reasonably be inferred, that the reporting entity has been required to file a ‘suspicious matter report’ with AUSTRAC. The case therefore provides food for thought to other entities seeking to navigate challenges associated with off-boarding customers without risk of offending the tipping off provisions.

Background

Human Appeal International Australia (Human Appeal), a charitable organisation, established banking facilities with Beyond Bank Australia Limited (the Bank) in March 2021. In mid-August 2021, the Bank notified Human Appeal that it was closing its facilities but declined to give any reasons for its decision other than to say that a review had been conducted and the business was not suitable.

The Bank’s terms and conditions specified that it “may, at any time, close any of your Accounts by giving you 20 days written notice. The notice does not have to specify the reasons for the closure”.

Notwithstanding this, Human Appeal brought proceedings against the Bank, claiming that:

1. the Bank’s termination of its facilities was invalid. It argued that the Bank’s right to terminate was subject was to an obligation of good faith and reasonableness, and because the Bank did not admit any evidence demonstrating it had a valid reason to terminate, it should be inferred that no reasonable grounds existed; and
2. if the Bank’s terms and conditions did permit termination without cause, this would be inconsistent with the Customer Owned Banking Code of Practice (the Code), being the industry code of the Customer Owned Banking Association to which the Bank had voluntarily subscribed and expressly incorporated into its terms. Human Appeal contended that compliance with the Code could be enforced against the Bank and that orders should be made compelling the Bank to vary its terms and conditions so as to require the existence of reasonable grounds in accordance with the Code.

Interaction of tipping off obligations and notices to produce

In dealing with the evidence, Parker J made a number of observations regarding the interaction of the AML ‘tipping off’ obligations and notices to produce.

Human Appeal sought production by the Bank of documents relating to its decision to terminate Human Appeal’s facilities. In response, the Bank provided bank statements of Human Appeal’s accounts, template letters for the notification of an account closure, and correspondence between the Bank and Human Appeal relating to the termination. However, the Bank did not produce any records of the review or the decision, and there was nothing said to suggest that the Bank had withheld any documents from production.

As such, it was not clear why the Bank withheld the relevant documents, or if there were any documents withheld in the first place. The Bank’s formal position was that there were no other documents to be produced. However, when asked whether there were other documents caught by the notice, senior counsel for the Bank gave a more qualified response, indicating that the notice had been complied with in accordance with the Bank’s statutory obligations and that the AML/CTF Act prevented it from disclosing whether or not any additional documents were caught.

Justice Parker did not attempt to resolve this point given the adequacy of the Bank’s response to the notice was not formally raised as an issue. However, his Honour did observe that the Bank would not be justified in withholding documents without also disclosing the fact that it had done so.

His Honour also considered the interaction between the tipping off provisions and an entity’s disclosure obligations under a notice to produce. His Honour observed that:

• s 123(1) and (2) of the AML/CTF Act prevent disclosure of the information to another person, such as a party to court proceedings. However, they do not prevent disclosure to a court itself because a court is not relevantly a ‘person’;
• s 123(10) of the AML/CTF Act, which addresses disclosure to courts, is not therefore an exception to the primary tipping off restrictions but instead operates as a stand-alone provision; and
• in the case of a notice to produce to court (or a subpoena), subsection (10) may be applicable. However, in the case of an inter partes notice to produce, it is arguable that s 123(10) does not apply at all and that considerations of tipping off are focussed purely on subsections (1) and (2).

In either event, his Honour observed that the tipping off provisions should not be read as preventing disclosure, in general terms, of the administrative burden that the AML/CTF Act, together with other reporting obligations, imposed on a reporting entity. Instead, tipping off restrictions ought to be considered and interpreted strictly on their terms and by reference to their purpose of managing risk that persons under investigation are relevantly ‘tipped off’.

While this conclusion is superficially unsurprising, in practice there can of course be significant challenges in navigating the extent to which information can be shared with third parties without falling foul of the tipping off provisions. Those provisions are notoriously difficult to interpret. They are not limited in their operation to communications made to persons under investigation and are not assessed by reference to the reporting entity’s intent (but instead by reference to an objective assessment of whether it could reasonably be inferred from the information that a suspicious matter reporting obligation had arisen). They expose the entity to a criminal offence. It is therefore equally unsurprising that reporting entities often choose to be cautious in their approach to tipping off in the context of document productions.

Validity of termination  

Duty of good faith and reasonableness

The Bank in this case conceded that it was only entitled to terminate Human Appeal’s banking facilities if it had a valid commercial reason to do so. Accordingly, Parker J left open the question of whether a bank’s right to terminate is always subject to an implied obligation of good faith or reasonableness. Instead, his Honour proceeded on the basis that the concession was likely informed by the fact-specific consideration that the Bank’s terms and conditions may arguably be said to contain an express obligation of good faith and reasonableness.

A key consideration was that the Bank had incorporated Part C of the Code in its terms and conditions. The Code listed ’10 Key Promises’ made to customers which relevantly included that the Bank would be ’fair and ethical in [its] dealings‘ and would treat its customers ’fairly and reasonably in all [its] dealings‘.

Issues with the Bank’s terms and conditions

Through its incorporation of the Code, the Bank’s terms and conditions were seen as requiring it to ’strike a fair balance between your legitimate needs and interests as our customer, and our interests and obligations, including our prudential obligations.’  This was understood by Parker J as imposing an obligation on the Bank to adopt revised terms and conditions if the existing terms did not reflect a ‘fair balance’ of the parties’ interests. Justice Parker ultimately found that the clause enabling the Bank to terminate without reasons did not strike a ’fair balance’ between the parties and that the Bank would need to adopt fresh terms and conditions. This was because:

• the Bank’s concession that it was not entitled to exercise its termination right without a valid commercial reason had little practical value given the customer would still be left with no means of finding out the reason for the decision; and
• relatedly, there would be no way for a customer to know that the Bank now accepted that termination without a valid commercial reason would be ineffective.

Failure to discharge evidentiary burden

Justice Parker ultimately found the Bank’s termination to be invalid on the basis that it did not put forward evidence of its reasons and therefore could not satisfy the Court that it had a legitimate commercial basis for deciding to off-board its customer. 

His Honour observed that if it were the case that compliance with the AML/CTF Act had resulted in disproportionate time being spent by members of the Bank’s Financial Crimes team on monitoring Human Appeal’s accounts, and the Bank no longer wished to bear that ‘administrative burden’, there was no reason why the Bank could not have disclosed this rationale in clear terms (without going into detail about any specific transactions/reports).

His Honour did not accept that the rationale for off-boarding was inherently incapable of being disclosed due to the tipping off provisions. The Bank submitted that if its decision was based on suspected financial crime activity, it would have been prevented from giving evidence about it. To this, the Bank sought to rely on the decision in Marundrury v Commonwealth Bank of Australia (No 2) [2022] FCA 916 in which a claim was dismissed as an abuse of process on the basis that sections 123 and 124 of the AML/CTF Act prevented a reporting entity from defending itself against the plaintiffs’ claims. However, Parker J distinguished the Marundrury decision on the basis that the claims pleaded by the plaintiffs in that case directly involved an allegation that the defendant had breached its suspicious matter reporting obligations, whereas any issue in the present case arose more incidentally.

It is, of course, entirely possible that the reasons for termination in this case did not engage the tipping off provisions and could therefore have been freely given. Extrapolating from his Honour’s observations, even if the reasons for termination include the identification of suspicious activity, it may be possible for reporting entities faced with similar decisions in future to point to administrative burdens, risk appetite or other matters that do not require them to specifically raise the existence of suspicious activity as a reason for account closures. However, his Honour’s reasons expose an ongoing challenge for reporting entities who wish to ‘de-bank’ customers where those reasons are in fact inherently tied to concerns that they are precluded by law from sharing.

A proposed change on the horizon  

Some of the challenges that may arise for reporting entities when seeking to off-board customers without infringing tipping off obligations may be able to be addressed differently in the future, depending on the outcome of the public consultation on Australia’s anti-money laundering and counter-terrorism financing regime announced on 20 April 2023 (the Consultation).

Among other things, the Consultation proposes that eligible agencies be authorised to issue a ‘keep open’ notice directly to a reporting entity that is concerned that the closure of an account will run too significant a risk of tipping off the account holder of the identification of suspicious activity.