When a Bank Meets a Red Flag and Settles the Account with You

When a Bank Meets a Red Flag and Settles the Account with You

Written by

Tal Schiller
April 6, 2018

The relationship between a client and a bank is sometimes similar to a relationship between a couple. At first there are smiles, promises, declarations, establishment of trust but with time comes the stage of routine in which each request from the other require persuasion. However, what happens when the partner - the bank - lost faith in the other side, become suspicious, notices red flags? What happens if the bank decided unilaterally to part ways? Can a client prevent the bank from closing the account?

On March, 2018, the Tel-Aviv District Court rejected a claim against a bank after it informed its clients, an Israeli company owned by a Virgin Islands company, and the Israeli director of the company that it unilaterally closes both company and director's accounts after the bank failed to receive documents indicating that the funds in the accounts are from a legal source.
In general, a banking corporation may not unreasonably refuse to accept a client or provide services to a client or to impose unreasonable conditions for the provision of services. However, there are circumstances in which a banking corporation may, and is sometimes even obligated to, refuse to provide service, such as suspicion of an activity related to money laundering. Under the Prohibition of Money Laundering Law and the orders promulgated thereunder, banking corporations are subject to identification and reporting obligations, which are not only passive obligations but also active obligations – an obligation to initiate reviews and identify suspicious transactions. The Israeli Money Laundering Prohibition Authority and the Supervisor of Banks published a series of "red flags" - a (non-exhaustive) list of circumstances that are additional to the circumstances described under the law and the orderes, which banking corporation should consider as signifying the need for special review or investigation on its part. If a reasonable explanation was provided, the existence of one red flag does not necessarily indicate a risk of money laundering. However, as the number of red flags rises the suspicion increases and may require a more careful review of the account. For example, suspicion should arise in the event of funds accepted from jurisdictions that are deemed to be tax havens; multiple transfers of substantial amounts to, and from, such jurisdictions; cash withdrawals in extraordinary amounts; financial activity that does not conform with the details of the business or for no reason or business logic; activity that is not typical to the client's profile or in a scope that does not match the information provided by the client upon opening of the account etc. Case law teaches that a client's failure to provide information would constitute a breach of the client's fiduciary obligation towards the banking corporation and given reasonable suspicion of money laundering activities, the bank may refuse to provide services and settle the account.

However, the net that is designed to catch money laundering and criminals often also blocks proper business activity. Sometimes, incorrect conduct of a client may cause funds (especially such arriving from outside of Israel) to "get stuck" or even lead to a situation in which the bank threatens to settle the account. Should one be escorted with the in-house attorney in every visit to the bank? Not necessarily, but it is certainly important that an attorney familiar with the field accompany the business in its relationship with the bank and in processes deviating from the normal course of business. Otherwise, the "savings" in legal costs during normal course of business may become a much more significant expense dealing with the bank at a later stage.