17
Mar2020

Banks. Closing payment Accounts. Suspicious actions. Possible fraud

In the analysis of this article, the law firm Costaş, Negru & Associates calls into question several issues which are topical and in connection with the closure of bank accounts for allegations of fraud or suspicious actions in financial-banking matters. The closure of bank accounts is a tricky issue and with the enforce of Law no. 129/2019 has become even more complicated. Banking institutions, those entities clients turn to when they need financial liquidity, have a few claims when it comes to transactions made through their accounts. From the beginning we say that we are not taking into consideration transactions regarding national security, such as acts of terrorism, because here the closure of the accounts would be justified, but on the contrary, we are talking about transactions that can be proven to be real and genuine.

Further, we will analyse the conditions for the payment accounts of a natural or legal person legally opened at a bank incorporated under Romanian laws which can be closed unilaterally.

How do banks close payment accounts? Or the unilateral status of closing the payment accounts.

The Bank, prior to the signing of any contract regarding payment account, whether we are talking about a natural or legal person, put in front of the customer the general business conditions. These business conditions, which are also accepted by default by the client, establish in favour of the bank some prerogatives in relation to the closure of payment accounts.

Common clauses (without references to a particular financial institution) which allow the Bank to close payment accounts are written as follows: The customer causes damage to the bank, provides untrue information to the bank, proves to be involved in fraud or money laundering or terrorist financing operations, is involved in public scandals and his association with the bank would harm its image, the customer poses a reputational risk.

The bank, starting from these provisions, makes an analysis of the customer’s account and observes several transactions, which say exceed the amount of EUR 50,000 per transaction (the limit imposed by the Bank may be less or higher). And the bank starts investigating. This analysis, which is absolutely internal and secret, depriving the customer of any possibility of defending himself or explaining the purpose of the transactions made, will lead to the automatic closure of the customer’s account if the bank suspects involvement in fraud.

In the event of account closure, the customer will receive a notification from the bank informing him that accounts will be closed within a certain period and that he has the possibility to transfer existing funds to another accounts. This is the good hypothesis because the accounts are usually closed immediately and the customer is notified only to withdraw all his liquidity from the bank because the commercial relations are concluded.

We briefly presented some indicators from which the closer of the payment account starts by one sided decision of the bank.

Main issues generated by the closure of payment accounts

Based on the situation described above we can list several problems. The first relates to the situation of legal persons, i.e. Article 1 (1) Law no. 70/2015 ‘Transactions in receipts and payments by legal persons, authorised natural persons, individual undertakings, family businesses, self-employed, self-employed persons engaged in independent activities, associations and other entities with or without legal personality from/to any of these categories of persons shall be carried out only through cashless payment instruments as defined in the law.’

With certain exceptions established by law, each professional is obliged to make financial transactions through bank accounts. Once a company’s accounts are blocked, the very essence of the legal person, such the economic character for which it was constituted, will be affected.

Of course, any self-respecting company has accounts opened with several banks, but most of the time notifications of suspicious transactions have interbank circulation and shortly each bank will investigate the operations of that company.

European regulation. Individuals.

The European provisions[1] on payment accounts opened on behalf of natural persons states that Member States ensure that payment accounts are offered to consumers by all credit institutions or a sufficient number of credit institutions to ensure access to them by all consumers in the territory of the Member States and to prevent distortions of competition.

Also in this Directive, 2014/92/EU, Member States shall ensure that credit institutions are offering payment accounts with basic services open payment accounts or refuse the consumer’s request for the opening of a payment account with basic services, in each case without undue delay, no later than 10 working days after receipt of a complete request.

In accordance with Article 19 (2) from Directive the credit institution may unilaterally decide to terminate a framework contract only if at least one of the following conditions is met:

  1. the consumer has deliberately used the payment account for illegal purposes;
  2. no transaction has been carried out in the payment account over 24 consecutive months;
  3. the consumer provided incorrect information to obtain the payment account with basic services, if the provision of the correct information would not have allowed such a right to be obtained;
  4. the consumer is no longer legally resident in the Union;
  5. the consumer subsequently opened a second payment account, which allows him to use the services listed in Article 17 (1), in the Member State in which he already holds a payment account with basic services.

In addition to all these cases, Member States may identify limited and specific additional cases where the credit institution may unilaterally decide to terminate a framework contract relating to a payment account with basic services. Such cases are based on provisions of national law applicable in their territory and are intended to avoid misuse by consumers of their right of access to payment accounts with basic services.

With regard to consumer guarantees, Member States shall ensure that, where the credit institution decides to terminate the contract relating to a payment account with basic services on one or more of the reasons referred to in points (b), (d) and (e) and point 21, it shall inform the consumer, in writing and free of charge, of the reasons and justification of termination, at least two months before the date on which the termination takes effect, unless such information is national security or public policy objectives. Where the credit institution decides to terminate the contract in accordance with points (a) and (c), the termination shall take effect immediately.

In conclusion, what is explained above shows us that consumers have the right to open a payment account with a financial institution in any Member State but if the consumer is accused or there is a suspicion that he is guilty of illicit deeds, as set out in points 20 to 21, then financial institutions may decide to close the bank account, as written above, with or without prior notice, as appropriate.

As regards legal persons we do not have such guarantees established by European rules, but national law allows both natural and legal persons to contract a payment account.

Free movement of capital.

In the event of the closure of the payment accounts by the bank, we shall also review one of the the principle underlying the functioning of the European Union, namely the free movement of capital. Regarding this principle, we would point out that Article 63 TFEU prohibits any restrictions on payments and movements of capital between Member States and between Member States and third countries.

The only justified restrictions on the movement of capital in general, including within the Union, are laid down in Article 65 of the Treaty on the Functioning of the European Union. These are: (i) measures to prevent infringements of national law (in particular in the field of taxation and prudential supervision of financial services); (ii) procedures for declaring capital movements for administrative and statistical purposes; and (iii) measures justified on the basis of public policy or public security considerations. Outside these restrictions, any other limitations on the movement of capital between Member States and between Member States and third countries shall be prohibited.

Without a coherent explanation of why banks close the payment accounts of a natural or legal person (because such motives would never be communicated), we would point out that banking financial institutions are in breach of the principle written in the Treaty on the Functioning Operation of the European Union and in our opinion the necessary sanction is to cancel the entire procedure started by the bank for breach of the law. Ensuring the free movement of capital is imperative for the proper functioning of the Member States and any restrictions must be explicit, motivated and fit within those provided in Treaty.

It is impossible to challenge the sanctions.

As far as we know, in relation to current banking practice, the possibility of challenging the payment account closure operation is non-existent or inefficient. Regarding the actual remedy and the possibility of challenging the harmful acts, we would point out that banks do not have special challenge procedures. Here we would tell the infringement of the right of appeal can also be regarded from a discriminatory perspective in the sense that the termination of the payment account contract was made inadvertently, arbitrarily and without indicating sufficient criteria which can lead to the censorship of such decision. In the absence of an administrative procedure, the holder of the account may bring an action in court concerning the determination of the invalidity of the payment account closure provision.

The legal basis under which a person will be able to take legal action the bank is given by the unlawful cause in issuing the provision to close the account.

However, it is desirable to avoid legal action and solve problems by administrative means, especially in view of the celerity of the procedure. An action before the courts may take several years, while hearing proceedings and filing evidence right before banks require a much shorter period.

We, therefore, point that in our opinion it is necessary to establish special procedures concerning the administrative challenge of the decisions for termination of the payment accounts.

The closing pressure generated by National Bank of Romania and the National Office for Prevention and Control of Money Laundering for the closure of the payment accounts.

In relation to banks there are two public institutions that impose certain criteria in cataloguing transactions as suspicious transactions, namely the National Bank of Romania and the National Office for Prevention and Control of Money Laundering. For better observation of financial markets but also for informing banks of the models to be considered for the catalogue of operations the two institutions have issued several guidelines and regulations aimed at helping Banks.

Information guide on the report of suspicious transactions.[2]

Concerning the abstraction of the money laundering law, both in the form provided for by Law no 656/2002 and Law no. 129/2019, the reporting institutions needed indicators predicting transactions with potential risk of suspicious transactions capable of being subject to the money laundering law. In this respect, since 2002 Romania, in cooperation with the european institutions, has adopted several guidelines to help credit institutions, as well as other reporting entities.

Thus, since the types of transactions that can be used by the money launderer are virtually unlimited it is difficult to define the suspicious transaction. The suspicious nature of the banking transaction performed stems from the unusual way in which it occurs, in relation to the usual activities of a customer. Suspicion is personal and subjective, leading the lack of trust in the person or persons who conduct the transaction, doubts as to the correctness, legality of the facts or the honesty of the intentions of the person.

In relation to financial institutions, the guide tells us that a suspicious transaction will be one that does not correspond to the customer’s data, its personal activities, the conditions of a legal business or its usual transactions.

The first and most effective method of recognizing a suspicious transaction is to know quite a lot about the customer and its businesses so a transaction or series of suspicious transactions can be recognised. As a rule, employees of reporting entities are more able to recognise money laundering activities if a customer behaves unusually.

The questions to be answered by a financial institution to determine whether the transaction with a current customer is suspicious may be as follows: Customer is able to provide personal information when opening an account or purchasing monetary instruments or when requesting or buying services? It is an ordinary transaction in the context of the customer’s business or his personal activities? When the transaction has a international nature, does the client have an obvious reason for running a business involving financial and banking institutions in another country?

We also learn in the guide that some examples have been drawn up that can lead the reporting institutions to the conclusion that a transaction may be suspicious. They include also the following situations:

  1. A customer presents unusual or suspicious identification documents which the bank cannot immediately verify;
  2. Customers request the cancellation or restructuring of a transaction, where, the conduct of the operation involves the reporting, identification, registration or further investigation by the reporting entity;
  3. Without plausible justification, customers use an intermediary or collaborator of an intermediary, located in an area far from the customer’s residence or activity.
  4. Unexpectedly, customers cover all or part of their debts;
  5. Customers require transactions to be carried out on unusual means, in particular, whether there are particularly complex or involve large amounts or have an illogical configuration;
  6. It is noticed a particular increase in cash deposits belonging to natural/legal persons for no particular reason, and such deposits were transferred immediately to a destination which normally has nothing to do with the customer’s activity;
  7. It is identified deposits and withdrawals of large amounts in cash, which far exceed the value of the customer’s turnover.

In transactions where cash is used, the following types of transactions may be suspected:

  1. Cash deposits immediately followed by the transfer to another account at a credit institution at home or abroad;
  2. Depositing in several branches without a particular meaning;
  3. Lending to the company’s accounts by their shareholders/directors, followed by repeated withdrawals justified as ‘loan repayment’;
  4. The consistency between credits and debits of an account on the same day or previous days.

All these examples arise from the practice encountered. A common method is to launder dirty money by depositing cash amounts, entitled “firm lending” / “increase in share capital”, in the cashier of companies controlled by suspect persons, directly or through third persons. Subsequently, after the funds are the subject of successive transfers, the amounts return to the suspect’s disposal, seeming to have a legal origin: “repayment of firm lending” / “return of share capital”.

It has been concluded that most money transfers are made through bank accounts. Although the recycling of funds through the accounts is at risk of being ‘on sight’, as banking institutions record all transfers as well as the identity of the persons making them, suspects prefer this method because of the speed and efficiency with which operations are carried out, as well as because money can be transferred anywhere in the world. The further the destination of money, the more difficult the financial investigation becomes.

In order to hide the true provenance of illicit funds, bank accounts can be used – at all stages of money laundering (placement, stratification, integration) and in financing of acts of terrorism – to carry out many types of operations. Finally the amounts involved are withdrawn in cash or transferred to third parties[3].

All the elements indicated in the above paragraphs serve financial institutions as items depending on which analysis of suspicious transactions starts and if the suspicions come true, the trading accounts of the clients will be closed.

 The arbitrary of the procedure.

As we pointed out above, the procedure for verifying transactions by natural and legal persons is unilateral and the decision on the closure of the accounts is impossible or extremely difficult to challenge. In our opinion, these rights constituted in favour of the bank without the actual possibility for the client to challenge the measures taken by the bank or providing explanations of the transactions carried out, ultimately leads to arbitrary procedures.

We qualify this action of the bank as a violation of fundamental rights (right of defence and breach of contradiction), as seen from a private perspective. At the stage of the analysis of the suspicious transactions, we consider that the account holder should be required to be heard in order to elucidate all the problems discovered by the bank.

Not least, we consider that there are many situations where either the bank’s decisions to close bank accounts are influenced by the pressure exerted by the National Bank of Romania (by imposing fines on the bank which, by hypothesis, would not be closed accounts through which suspicious transactions would have been carried out), or the bank’s decisions may be influenced by the more difficult understanding of industries or types of transactions. For example, it should be noted that there is a current practice on the market for tourism services allowed by law to collect the value of packages of tourist services in cash and in foreign currency, followed by immediate lending of the bank accounts of tour operators . Also, if we are to refer to a field with a fulminant evolution, there are currently various types of operations with virtual currencies (e.g. an ATM that allows the conversion of virtual currencies into cash) that are harder understood by institutions and sometimes ab initio as fictitious. That is why we plead to the regulation of a special procedure for the control of decisions for unilateral closure of bank accounts in the pre-judicial phase, in which all parties understand the reasons underlying certain transactions and that is to say, reasons of general interest which could lead a bank to waive a contractual relationship which benefits it.

This material was prepared for the firm’s website by av. Adrian Docoli (Cluj Bar Association).

[1] DIRECTIVE 2014/92/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 July 2014 on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features.

[2] The updated edition of suspicious transaction guide, adopted in September 2004 – available http://www.onpcsb.ro/pdf/ghid%20tranzactii%20suspecte%20romana.pdf

[3] Book on risk-based approach and indicators of suspicious transactions – available at http://www.onpcsb.ro/pdf/manual_privind_abordarea_pe_baza_de_risc.pdf

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