There can be no doubt as to the growing global trend of governments to deputize banks and other financial institutions. Banks are becoming partners with law enforcement agencies throughout the world in society's effort to fight crime, tax evasion and terrorism. There are obviously pros and cons to this trend, although I do not intend to discuss that matter here. You can read this op-ed, "When Banks Become Law Enforcers" from Cointelegraph.com for a critical analysis of this modern trend.
I will note, however, that our firm took the lead in attempting to challenge this trend last year when we filed a petition with the Israeli Supreme Court attacking the constitutionality of the legislation applying the U.S. Foreign Accounts Tax Compliance Act (FATCA) in Israel. Echoing and affirming this global trend of over-regulation, Justice Mazuz, at oral argument, stated that “the alternative to privacy is criminal acts of every kind. This is nothing new, except for the fact that it is regulated now under law and other mechanisms. It’s like the infringement on the right to freedom of occupation. There is always a need for licensing, regulation, and supervision. There are many infringements on freedom of occupation, right to property and privacy, because without it modern society cannot function.” (The official judgement in that case is likely to be published in the next month or so).
In a recent decision on an appeal to the Supreme Court, the bank was called the "extended arm" of the law enforcement agencies, once again confirming the view of the Israeli Supreme Court that the banks have overreaching authority to make sure their customers are complying with the law. In Har Shel Bracha and Hatzlacha, Ltd. v. Bank HaPoalim, Civ. App. 6685/17 (10 Sep. 2017) the Court upheld the trial court's denial of a temporary injunction against the bank from closing the appellant's business account. In its decision, the Supreme Court noted the important principal in Israeli banking law that a bank's suspicion of its customer need only to be "reasonable" to establish a cause for closing or otherwise limiting the use of the account. Notably, the Court also made clear that although the burden of proof rests with the bank, this burden is met under a standard somewhat lower that a "preponderance of evidence" standard used in civil cases. (This low standard has been upheld in England as well where in 2015 the High Court Queens Bench Division in Iraj Parvizi v Barclays Bank Plc set the standard of suspicion to be only "more than fanciful" to justify the freezing of a bank account by a bank).
Although not a very fascinating case, it highlights yet again the burdens that customers will increasingly encounter with their banks. In fear of prosecution from their governmental supervisors, banks will not hesitate to close accounts or otherwise infringe upon customer rights, even if the suspicion is minimal. After all, they have nothing to fear, for the courts of law are behind them.
Israel however, did not need to reinvent the wheel in this regard. It can be said that when it comes to the regulation of banks and other financial institutions (to the detriment of the customer), the U.S. is at the vanguard. Under U.S. federal law, banks are subject to suspicious activity reporting both under FinCEN (the Financial Crimes Enforcement Network) regulations (which focus on money laundering activity) and parallel regulations issued by the federal bank supervisory agencies (which require reporting of known or suspected violations of federal criminal law). FinCEN regulations provide no guidance regarding under what circumstances a bank, after a finding of suspicious criminal activity, should stop dealing with the customer. Under U.S. law and practice, as a general rule, the bank must decide for itself whether and when to terminate the relationship.
A few weeks ago, On 11 August 2017, in John Doe v. Merrill Lynch, the United States District Court for the District of Columbia dismissed a negligence law suit by customers against their bank for the alleged negligent closure of the account due to suspicious illegal activity. The Court found that the plaintiffs provided "no facts to support their assertion that reasonable commercial standards in any relevant state require banks to investigate totally external information that impedes their banking relationship or to provide customers an opportunity to respond to that information before a bank account may be closed, with prior notice".
For better of for worse, the modern commercial context has ushered in an era of quasi-privatization of law enforcement in the hands of the banks. Customers and clients will probably never enjoy the same freedom and liberty (and certainly privacy) they once had in their dealings with their banks. Legal recourse by court action challenging the actions of banks in this regard will need to be able to demonstrate a clear abuse of discretion to overcome the bias legal atmosphere that we discussed here. However, approaching the courts more often, challenging this seemingly inevitable trend, may also lead to small but important victories for consumer rights.