Legal relations in the field of banking are characterized by a number of features distinguishing them from other typical civil law relations. As a result, regulation of banking relations is often misinterpreted by the participants therein, which sometimes leads to complex conflicts between them. Application of special legislation on financial monitoring of the “bank-client” relations, in particular Law No. 361-IX of December 6, 2019 (hereinafter referred to as the “Law”), is one of the reasons for such disputes.
Right and obligation to refuse the provision of services to a client
According to part 1 of Article 15 of the Law, the bank, which by default acts as a subject of primary financial monitoring, in some occasions must refuse to enter into legal relations with a client and provide further services to him/her.
In this case, the bank’s refusal may consist in failure to open the account itself, terminating the banking services agreement, failure to conduct a financial transaction. Yet, the legislator allows such refusal of the bank (and even requires it) in the following cases:
- it is impossible for the bank to identify the client or its beneficial owners;
- the bank has doubts that a person declared as the beneficial owner of the client acts on his/her behalf;
- the client has been assigned the unacceptably high risk;
- the client has failed to provide data or documents required by the bank during the verification;
- the client has misled the bank by providing inaccurate information;
- the correspondent bank participating in the transaction has been recognized as a shell bank.
However, in addition to this obligation to refuse to cooperate with a client, the Law explicitly allows the bank not to conduct a transaction, which seems suspicious to a bank.
The specified formulations are mostly evaluative and leave the banks a wide space for their interpretation, which from time to time becomes a basis for challenging the bank’s actions by clients.
Yet, such evaluation of the bank must be based on unbiased principles, namely the risk criteria (hereinafter referred to as the “Criteria”) approved by Order of the Ministry of Finance No. 584 of July 8, 2016. By virtue of such Criteria, the banks must develop their own risk criteria, which, however, must be based on the requirements and recommendations set by the National Bank.
No collision of norms
From the civil legislation perspective, the bank’s refusal to provide services to a client can be treated as a unilateral waiver of a transaction, the bank’s right to which does not contradict the provisions of part 1 of Article 651 of the Civil Code. This Article of the Civil Code does not allow to amend or terminate an agreement without consent of the parties, yet contains an exception to this general rule — such amendment/termination is allowed by law.
Instead, according to part 1 of Article 1067 of the Civil Code, the bank must enter into a bank account agreement with a client on the initiative of the latter under the terms and conditions determined by the bank.
The Civil Code explicitly excludes the bank’s refusal to open an account, while providing for the client’s right to protect his/her rights in case of unreasonable evasion of the bank from entering into an agreement. However, the abovementioned rule provides for exceptions under which the bank’s refusal will be deemed lawful:
- if the bank cannot take a client for servicing (which, obviously, does not exclude the broader interpretation)
- if the bank’s refusal is allowed by law or banking rules.
At the same time, the bank shall have the right to unilaterally demand termination of a bank account agreement in cases stipulated by the legislation on financial monitoring, which is confirmed by clause 3 part 2 Article 1075 of the Civil Code.
When assessing the application of the specified norms, in its decision dated August 30, 2018 (case No. 910/22248/17) the Commercial Court of Cassation concluded that provisions of the Law, under which the bank has the right to unilaterally waive an agreement, include special legislative norms covering the cases of refusal to maintain business relations with a client with the unacceptably high risk. Thus, the position of the court of cassation is that special rules are to be primarily used, which corresponds to the provisions of paragraph 2 part 2 Article 1067 of the Civil Code.
Right to refuse is not absolute
Therefore, the law grants the bank the right to refuse the provision of services to a client, while requiring mandatory reasoning for such refusal.
The Supreme Court adheres to the same position, which, in particular, in its decisions of April 29, 2020 (case No. 910/3245/19) and December 10, 2020 (case No. 910/507/20), emphasized that the bank were not granted an unlimited right by the legislator to refuse the provision of services to a client by terminating the bank account agreement, even if the client was assigned the unacceptably high risk.
Moreover, in case No. 910/3245/19 the cassation court, having taken the plaintiff’s side, justified its conclusion by the fact that the bank had failed to provide the courts with any evidence confirming the grounds on which the plaintiff was assigned the unacceptably high risk following the results of a risk assessment. Yet, the court noted that the bank had failed to provide an internal financial monitoring risk management program which was to contain specific criteria for the unacceptably high risk.
In addition, according to the court of cassation, the bank failed to prove the validity of grounds based on which funds and assets of the corporate client were considered as originating from the illegal source, and failed to prove that the client’s transactions had signs of money laundering. The court was not persuaded by the initiated pre-trial investigation, the subject of which was the plaintiff’s transactions, as it alone (obviously without a relevant court verdict) may not be deemed an unconditional basis for assigning the unacceptably high risk to a client for the bank.
However, earlier in its resolution of February 20, 2018 (case No. 910/11471/17), the Supreme Court recognized internal banking documentation on financial monitoring as restricted documents. Therefore, according to the Supreme Court, the bank must not provide local documents to clients for review, which include, inter alia, the above risk criteria, since this may facilitate illegal activities by the clients at combating which such documents aim.
The issue of how bank must justify its refusal to a client may not be deemed as settled yet. On one hand, the lack of criteria for assessing the degree of client’s risk will indicate, that the bank arbitrarily applied the relevant provisions of the legislation, which would violate the client’s rights, and on the other hand, disclosure of information on such criteria may facilitate illegal transactions.
In most cases, the banks manage to prove in court that their refusal to a client was lawful, but only subject to full and proper compliance with all legislative and internal procedures. Therefore, the application of financial monitoring measures undoubtedly requires close attention from both the relevant services of a financial institution and each client.
Otherwise, the consequences of client’s rights violation may be extremely significant — in particular, the application of default interest stipulated by part 5 of Article 10 of the Law “On the Protection of Consumer’s Rights”, the amount of which due to ambiguous case law might dramatically exceed the amount of funds deposited by a client to a bank account.