Banks must explain to clients why they want certain documents

Banks are expected to give reasons why they are asking for documents when they are carrying out a due diligence on a customer.

Banks are expected to give reasons why they are asking for documents when they are carrying out a due diligence on a customer. This was held in a judgment delivered by the Court of Appeal on 3 April 2024 in Ignazio Licari vs Bank of Valletta plc. The Court was presided over by Mr Justice Lawrence Mintoff.

The appeal was lodged by Mr Justice Ignazio Licari from a decision given by the Arbiter for Financial Services. In his decision the Arbiter agreed with the Bank that closed Licari’s accounts. The Arbiter did however, give some recommendation. The Arbiter asked whether the Bank would consider opening a bank account for Licari, if the latter passes on his income tax return. This was done in the spirit that elderly people may not appreciate that the reality of today is different from that of the past.

The case was instituted after Licari received a letter from the bank in February 2022 informing him that his accounts were to be closed and he had two months to make other arrangements. If this did not happen the bank would close the account, all the same and send a cheque with the balance in the account.

Licari filed a complaint and held that he was suffering damages. He asked the Arbiter to declare that the bank’s decision to close the account was abusive and unnecessary and to order the bank to re-open the account.

The Bank argued that Licari failed to give information which dealt with certain accounts and he failed to give his income tax return in order to verify the transactions he was carrying out. The bank chased Licari for him to pass on the income tax return.

The Arbiter in his decision, held that in another case he had listed the elements of a banking relationship. This includes fairness, equity and reasonableness. These elements may be found in the Arbiter for Financial Services Act.

The Arbiter explained that in the past consumers made use of cash, then used cheques. Today the banking world has been transformed totally. Today banks are asking clients to use digital means of payment, such as credit and debit cards or online payments. Therefore, a bank account is necessary and as a consequence the closing of the account should be the last measure used by the bank. Banks must carry out due diligence exercises on their clients. These must be proportionate and must be tailored to the client and not “one size fits all”.

In this particular case, the parties had a long-standing commercial relationship. The account was a complicated account and needed an enhanced due diligence. Licari had a number of accounts, some his personal accounts some were used as a liquidator and passed on substantial amounts of money, which were not his personal income and therefore not taxable.  Licari was of a certain age. When he gave the bank his source of wealth there were some discrepancies. The Arbiter interpreted this as a confusion of what was actually required. Licari refused to hand his income tax return and the Arbiter held that his is unacceptable. This is derived from Licari’s lack of understanding of the bank’s obligation to make sure that there is no money laundering. The bank gave a number of opportunities to Licari to fulfil his obligations and pass on the income tax return. The Arbiter held that it is essential that there is co-operation with the bank for it to fulfil its obligations. Since Licari is still refusing to pass on his income tax return, then the bank’s decision to terminate its relationship with his is justified.

Licari appealed this decision on the ground that he did not receive a fair hearing and the Arbiter was not impartial and that the Arbiter misinterpreted the law.  The Court of Appeal disagreed with the first ground of appeal, since the minutes of the proceedings show that Licari was able to argue his case and make written submissions. The Court of Appeal held also that it was not competent to see whether Licari received a fair hearing. This is the competence of the constitutional courts.

Licari further explained that he had given the bank a number of documents it requested and after he presented these documents, the bank requested further information including his income tax return, without explaining why this is needed. Therefore, according to Licari the fact that the Arbiter held that the bank had regulatory obligations was irrelevant. This is because the bank had all the information it required. According to Licari, the bank just wanted to close the accounts.

The Court of Appeal pointed out that the documents requested from Licari were not listed in the form called Declaration of Source of Funds, although they may have been requested if the need arises. The Court held that the bank requested the income tax return without specifying what was the need and what doubt did they have. The bank’s customer has a right to know why it is asking for this information. The Court of Appeal held that the issue between the bank and its customer could have been easily settled, if the bank had given clarifications. Furthermore, it seems that the bank may have asked for more information even if the income tax return was provided.

The Court considered the age of Licari, who would not appreciate the complexities of the regulatory systems that exist today. Furthermore, the requests were made during COVID, where elderly people were advised not to go out.

It was shown also that Licari had also some medical issues. Therefore, some more explanation from the bank would have been advisable. There was no suspicion of money laundering in this case.

The Court disagreed with the Arbiter, who said that Licari did not give in his income tax return was unacceptable. As mentioned the Court held that the bank was responsible for a lack of clarity and the bank could have asked for other documents in order to carry out its verifications.

As to damages, Licari held that this incident was a trauma and he fell into a depression and that he was taking medicine. He had no account and could not even receive his pension. The Court acknowledged the difficulties Licari found himself in and awarded him €500 in damages.

The Court of Appeal also ordered that the account be reopened.