What you need to know
- Banks, and other anti-money laundering and counter-terrorism financing (AML/CTF)-regulated institutions, are sometimes required to make risk-based judgments about whether to continue relationships with their customers. But banks and institutions also have contractual relationships with their customers, which may resist being "de-banked" given the potential difficulty with finding alternative equivalent banking services.
- This issue is now being frequently litigated, with recent cases highlighting how the courts will approach de-banking questions, particularly in the context of managing anti-money laundering risks.
- The cases consistently highlight that banks and other institutions can give themselves the ability to terminate customer relationships based on concerns about money laundering, terrorism financing or proliferation financing (ML/TF) risk, without the need to demonstrate that those risks had definitely arisen or had been fully investigated, or that termination was the only available option. This is important in enabling institutions to effectively manage ML/TF risk in accordance with their risk appetite.
- However, each case turns on the interpretation and application of the particular contractual terms and conditions. In each case, the court either decided or assumed that the decision had to be objectively reasonable or rational under the applicable terms. Accordingly, it is critical that the evidence assembled by the institution in support of its decision both reflects the specific requirements of the terms and supports a conclusion that the decision was objectively reasonable.
- The terms and conditions themselves may also be attacked as unfair contract terms, and this is another lens through which to consider de-banking risks.
- Unsurprisingly, many of the cases also involve requests for interlocutory injunctions. In that context, the courts have shown a preparedness to refuse injunctive relief on the basis that (i) exposing a bank or institution to ML/TF risk including potential breaches of the AML/CTF Act is a real prejudice which weighs against an injunction; (ii) they can be sceptical that the customer will be unable to arrange alternative services absent compelling evidence; and (iii) the court is unlikely to permanently require an institution to maintain a customer relationship where the institution holds rational concerns about ML/TF risks. However, each case will turn on its own facts including the strength of the plaintiff's case.
What you need to do
- Review your contractual terms and conditions to check that they are consistent, clearly drafted and appropriately mitigate unfair contract terms risk. Those terms will be critical in any disputes with your customers.
- Consider your AML/CTF Program and what is required in order to de-bank a customer: while strict compliance may not be required in order validly to exercise the contractual right to terminate, consistency may reduce the likelihood of dispute and a material departure from the substance of the Program could be treated differently by the courts.
- Ensure decision-making around de-banking is well documented, consistent with the terms and conditions and AML/CTF Program, and the relevant personnel are informed by the appropriate information to assess whether the customer should be de-banked having regard to the level of ML/TF risk. Being able to evidence this process clearly is critical to defending de-banking claims.
Background
The "de-banking" of customers (termination of the customer relationship or suspension of services, often for reasons related to regulatory or reputational risk) is increasingly common and has attracted political and legal focus. De-banking cases raise issues about the consequences that may be visited upon customers who could be left without access to critical banking facilities on the one hand, and on the other hand, the need for banks to manage the risks to them of doing business with customers in a heavily regulated environment. It has therefore become a frequent ground for litigation, in Australia and internationally, over recent years.
A key focus of recent Australian decisions has been on de-banking to manage ML/TF risks. This reflects the importance banks and other institutions give to actively managing those risks, having regard to the obligations in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and associated rules (AML/CTF Act and Rules) and the heavy penalties which have been applied for breaches in the past, including in the banking sector. A similar trend can be seen internationally in cases such as Al Yasin v Starling Bank Limited [2025] EWHC 3582.
It would be a concern for banks and other institutions if they were to be forced to continue to bank, and process transactions for, customers where doing so would or could breach their obligations under the AML/CTF Act and Rules. Helpfully, the case studies in this article show that the courts have so far taken an approach which acknowledges the importance of being able to manage ML/TF compliance risk, and gives weight to the risks to institutions from being forced to continue to bank customers. However, the outcomes in each case study turn on the particular contractual rights relied on and the evidence led to support the decision. Accordingly, it is critical that banks and other institutions learn from these decisions, and where necessary adapt their contractual terms, underlying processes and record-keeping to enable them to support de-banking decisions under court challenge.
Case Study 1 - Puleo v Bendigo and Adelaide Bank [2026] VSC 513
This recent case was unusual in that it proceeded to a final hearing without a contested interlocutory injunction application being determined. At trial, detailed evidence including expert evidence was relied upon by the plaintiffs (Puleo). The claim related to a decision by the bank to de-bank personal and company accounts associated with a South Melbourne brothel and its operators.
Puleo contended that the bank had failed to comply with its AML/CTF Program in making the decision to cancel, and in particular that it was required to undertake Enhanced Customer Due Diligence (ECDD) including a detailed transaction analysis, but had not done so. Puleo's expert opined that he would have required further detailed analysis for the purpose of decision-making on de-banking, and that the bank ought to have issued an ECDD questionnaire seeking information from the customers (this was not done due to "tipping off" concerns).
Matthews J, building on the approach taken in her Honour's earlier decisions on de-banking, rejected those contentions by Puleo: the AML/CTF Program was not in this context prescriptive but rather descriptive or facilitative; it was not the case that the slightest deviation from its language would constitute non-compliance. In any event, consistently with the earlier cases, the question of compliance with the AML/CTF Act and Rules was different from whether there was a reasonable basis to close the account having regard to ML/TF risk. Thirdly, the bank was not required by its AML/CTF Program to carry out a detailed transaction analysis in all cases, and had met its obligations under the Program in this case. (Some of the detail on this point is confidential and not included in the judgment).
Having regard to these matters, Puleo's claims failed. A number of claims were advanced, including a claim for discrimination, which failed on the basis that the decision was not motivated by or reflective of a policy not to bank brothels. The main focus of this update is on the contractual issues, but banks can expect to see attempts to advance similar novel claims in future.
Puleo also claimed breach of the contractual provisions entitling it to close accounts. The relevant terms provided:
We may close your account at any time, due to unsatisfactory conduct or for any other reason if we consider it necessary to prevent fraud or other losses to you or us or to protect our legitimate business interests, …
We may only exercise our rights under a term in these terms and conditions to the extent (if any) reasonably necessary to protect our legitimate interests. …
Her Honour accepted that those terms had both a subjective and objective aspect: it was necessary both that the bank consider termination to be in its legitimate interests and that it be objectively reasonable to exercise the termination right having regard to that interest. However, this did not mean that an actual money laundering risk had to be established – it was the potential or possibility of ML/TF risk which the clause addressed. The bank was also not required by the clause to follow a prescriptive process involving a detailed transaction analysis to reach the view that termination was appropriate. Further, the fact that this was not done did not show that the bank merely viewed termination as desirable rather than necessary. The bank's evidence showed that it had followed an appropriate process and reached an objectively reasonable conclusion that the relationship should be terminated.
Puleo then argued that, if a broad construction of the clause were adopted, it would permit the bank to terminate a customer relationship to minimise compliance costs or based on a sloppy analysis, and the term would therefore be an unfair term under the ASIC Act unfair contract terms regime. The judge rejected this argument on the basis that it did not reflect how the term had been construed: the right could only be exercised based on a rational/reasonable analysis of why termination was required due to ML/TF risk.
Interestingly, Puleo also sought to argue that the conduct breached the "efficiently, honestly and fairly" obligation in s 912A(1)(a) of the Corporations Act 2001. This was rejected principally on the basis that the alleged contravention was said to flow from a breach of the AML/CTF Program, which Puleo had not established. Her Honour also observed that there was no necessary connection between compliance with the Program and the "efficiently, honestly and fairly" obligation; potentially a decision to terminate could be reached in a number of ways which would still comply with s 912A(1)(a), even if not strictly in accordance with the Program.
Because of this finding, the judge left open important matters including whether s 912A(1)(a) gives rise to a private right of action (historically it has not, but the 2019 law reform adding it to the civil penalty regime may create some uncertainty) and whether it was capable of being breached in a one-off instance as opposed to by reason of systemic conduct impacting many customers.
Case Study 2 - Merciful Group Inc v Norfina Ltd t/as Suncorp Bank [2026] NSWCA 155
This was an appeal against the New South Wales Supreme Court's decision that Suncorp Bank was entitled to "de-bank" a customer to protect its legitimate interests, where it held a rational honest opinion that there was an unacceptable ML/TF risk (see our previous update here). Merciful Group's appeal was dismissed.
The case concerned a charity, Merciful Group, which had the stated objective of providing aid to various countries, including Lebanon, Syria and Yemen. Merciful had operated an account with the bank since 2019. The bank had exercised the following termination right, which contains an apparent drafting error:
We can close your Account immediately if:
…
(c) to protect our Legitimate Interests;
At first instance, Hammerschlag CJ concluded that this did not require the bank to demonstrate that it was necessary or reasonably compelled to terminate the relationship, merely that termination had to have a rational justification having regard to legitimate interests. His Honour doubted that termination had to be objectively reasonable but found that test satisfied, if it applied.
The Court of Appeal partly rejected the primary judge's construction, concluding in the context of the clause read as a whole that the power could be exercised only where the bank "need[s] to protect our legitimate interests", and noting without deciding that there was room for debate as to whether the power also had to be exercised reasonably. However, the Court agreed that the evidence demonstrated that the bank had formed the view that termination was needed to protect its legitimate interests, and that view was an objectively reasonable one. The bank had led detailed evidence, summarised in the first instance judgment, as to its consideration of the customer and the ML/TF risks arising.
In reaching this view, the Court emphasised that different institutions will have different risk appetites in relation to ML/TF risk, and that the reasonable conclusion that it is necessary to close the account can be reached even where other steps (such as restricting transactions and seeking further information) are potentially available. In any event, the Court noted that it had not been put to the bank's witness that alternative steps were available and the evidence established that the bank had reasonably concluded that no other measures were appropriate.
Case Study 3 - Bano Pty Ltd v Australian Settlements Limited [2026] FCA 932
This case concerned the suspension by Australian Settlements Limited (BCAU) of services to Bano (a payment services provider) due to ML/TF concerns and material breach of contract. The services provided by BCAU included access to Australian payment systems such as the New Payments Platform (NPP). Bano sought an interlocutory injunction preventing the suspension from taking effect.
The relevant agreement between Bano and BCAU entitled BCAU to suspend services in the following circumstances:
15.3 We also reserve the right to suspend the operation of a Settlement and Processing Service at any time without notice if we reasonably believe that suspending the service immediately is necessary to protect our interests and/or those of users of that Service.
15.4 We may suspend your access to a Settlement and Processing Service without notice if we believe on reasonable grounds that you have materially breached any of your obligations under this System User Contract.
81.1 We may suspend your ability to make Osko Payments or other NPP Payments at any time where we believe on reasonable grounds that it is necessary to do so to prevent loss to us or you, including where we suspect that the service is being used or will be used in a fraudulent manner.
BCAU issued notices of suspension pursuant to the above provisions. The relevant breach for the purpose of clause 15.4 was Bano's failure to obtain certain approvals in relation to cryptocurrency-related payments.
Goodman J considered the prima facie case that BCAU was not entitled to suspend to be weak. Further, his Honour considered that the balance of convenience was strongly in favour of not granting the interlocutory injunction sought by Bano.
First, his Honour accepted evidence that BCAU would be exposed to a real risk of loss if an injunction were to be granted and BCAU required to continue to provide services to Bano, as BCAU would be at risk of failing to manage risks as required under the AML/CTF Act and comply with its own AML/CTF program, and thereby putting BCAU at risk of coming under investigation by APRA and AUSTRAC.
This was a real risk of loss, which made the existence, and worth, of any undertaking proffered by Bano a matter of considerable importance. However, Bano's financial statements for the year ended 30 June 2025 indicated that it was unlikely to be in a position to meet that undertaking. A guarantee and indemnity given by Bano under deed poll was also not accepted by the Court as providing satisfactory security for the undertaking as to damages.
Relevant to the Court's consideration of balance of convenience was that the evidence of Bano about the inability to secure a replacement provider of payment infrastructure was far from persuasive. Any problems of Bano in obtaining a new payments infrastructure provider were not problems for which BCAU was responsible, particularly in the context of a contract which was not exclusive, with evidence suggesting that Bano had expressly declined during contractual negotiations to enter into an exclusive arrangement.
Notably, it was remarked that the Court ought be reluctant to require an entity obliged to comply with the AML/CTF Act and Rules to continue in a contractual relationship with a counterparty it had genuinely assessed as posing an unacceptable risk with respect to that Act.
What next?
Notwithstanding the success that banks and institutions have achieved in each of these cases, we expect to see further de-banking litigation, particularly where the de-banked customer has no alternative banking services provider. Accordingly, banks should be prepared for de-banking decisions to be challenged in court.
The cases show that the courts generally accept that concerns about ML/TF risks can be an objectively reasonable justification for de-banking. However, each case will turn on its own facts and the evidence led as to the process followed by the institution. It therefore remains critical that institutions give close consideration to ML/TF risk, having regard to their usual processes, AML/CTF Program and risk appetite, in deciding whether to terminate the relationship. It will be necessary to evidence that consideration if there is a challenge. In some of the case studies, there were difficulties for the institutions because of a lack of memory or records around particular points in the process. Accordingly, institutions should consider road-testing their de-banking processes to ensure they are defensible and will generate appropriate records.
These cases are a timely reminder to review contractual provisions for suspension and termination. Merciful emphasises that even if courts accept in principle that ML/TF risks may justify termination, they will construe the terms according to the usual principles of construction where a drafting error or ambiguity arises, which may lead to institutions having more restricted termination rights. It is important for institutions to check that the terms and conditions provide adequate termination rights where ML/TF risks arise.
Plaintiffs will also likely continue to explore other ways of attacking termination rights, including as unfair contract terms (breach of which can also carry significant civil penalties). Again, institutions should consider testing their terms against Matthews J's comments in Puleo and whether any changes are appropriate to mitigate risk.
Finally, while the courts have not required institutions to show actual ML/TF risks or necessity in order to terminate, the less intensive the institution's analysis the more scope there may be to question the reasonableness or rationality of the decision or suggest it was motivated by improper considerations. Institutions should bear in mind that devoting more time/resources at this stage may reduce the likelihood of legal challenge or at least make them easier to defend.
Authors: Mark Bradley, Partner; Lorraine Hui, Partner; James Donnelly, Lawyer and Ahmed El-Jaam, Lawyer.
