It is increasingly common for banks to terminate a relationship with a customer – sometimes dating back many years. Such termination of a banking relationship can have serious consequences for a business owner. Can a bank terminate a credit relationship? When is it allowed and when is it not? Below is a brief explanation of the background to such termination and the rights and obligations of banks and account holders.
WWFT and customer due diligence
In the WWFT (Law for the prevention of money laundering and financing of terrorism) the government has made banks responsible for detecting so-called financial-economic crime and other integrity risks. In recent years, the Public Prosecutor’s Office has conducted investigations at several banks because the banks did not properly carry out the obligations imposed on them. The client files at the banks were not in order. Several banks have paid fines (transactions to prevent further prosecution) of even hundreds of millions of euros. It is therefore not surprising that banks take their obligations to conduct customer due diligence seriously. Many an entrepreneur has by now familiarized himself with questions from banks and is becoming familiar with abbreviations such as KYC (Know Your Customer), CDD (customer due diligence) or AML (anti-money laundering). This customer research does not only affect entrepreneurs who are applying for a bank account, but also entrepreneurs who have been banking with the same bank for years.
General banking conditions
The agreement between the bank and the customer is governed by the General Banking Conditions. On the basis of these General Banking Conditions, the Customer is obliged to inform the Bank and to keep the Bank informed of his activities and the origin of the financial resources that the Customer places with the Bank. If the bank is unable to complete a customer due diligence, the bank must terminate the relationship with that customer. The bank is then unable to oversee the risk of abuse of the services offered by the bank. It is not necessary for a bank to have concrete indications that the customer is involved in criminal activities.
Obligation to cooperate in customer due diligence
Banks depend on the cooperation of customers to obtain information. Customers are obliged to inform the banks on the basis of the general banking conditions. The bank’s questions are many:
- who are the shareholders;
- who are the UBOs;
- who are the suppliers;
- who are the customers;
- how is the turnover structured;
- how to reduce the share of cash payments in turnover;
- what is the background of payments to foreign bank accounts;
- what is the customer’s screening policy;
- etc. etc.
There are customers who cannot or will not fully answer the very extensive questions posed by banks, or at least are passive and do not actively cooperate in providing the requested information. A bank can then make use of the contractual right included in the general banking conditions to terminate the customer relationship.
Can the bank terminate the customer relationship?
A bank’s right to terminate the customer relationship is not unlimited. Banks have a social function and, by virtue of this, a special duty of care to customers. Banks must take the interests of those customers into account. By terminating a relationship, the client loses access to the banking system and the consequences are serious for the client. After all, it is impossible to operate a business if you do not have a checking account with a bank. There may be circumstances that mean that it is unacceptable according to the standards of reasonableness and fairness for a bank to use its contractual power of termination. This involves a balancing of interests. There is the bank’s interest (for example, to meet the legal requirements of customer due diligence) and there is the customer’s interest (for example, to have access to the banking system).
Weighing up interests when terminating a customer relationship
What circumstances may play a role in this balancing of interests?
- Is there sufficient insight into the origin of the client’s financial resources?
- Is there sufficient insight into the client’s activities?
- To what extent is there insight into the customer’s payment flows?
- Is the customer meeting its obligations to the bank?
- Are there many receipts from or payments to foreign parties?
- Are the payments traceable to invoices?
- Can any cash flows be sufficiently substantiated?
- Does the customer have a screening policy for suppliers and customers?
- Does the customer have access to the banking system through accounts at another bank?
- Is there an explanation for rapid changes in turnover?
These are just a few of the circumstances that are cited in procedures. In addition, the specific circumstances of the customer itself are important.
What to do in the event of a customer inquiry by the bank?
It is important to take the investigation seriously. Banks are obliged by law to carry out the investigations and the customer is obliged by the general banking conditions to cooperate and provide the requested information. This can be a laborious process for both parties. An intention of the bank to terminate a customer relationship is usually announced well in advance. If further consultation does not lead to a solution, the customer can demand the continuation of the relationship in a preliminary injunction. The judge in preliminary relief proceedings may decide to do so if it is sufficiently plausible that in proceedings on the merits the client’s claim to restoring the customer relationship will be granted and that the client cannot be expected to have no bank account at his disposal until that time.
Looking for a corporate law lawyer in Rotterdam?
If, after reading this article, you have a question concerning the termination of a customer relationship by your bank or if you have another question in the field of corporate law, please contact Rob Steenhoek.
