Corporate tax in the UAE
In January 2022, the Ministry of Finance (Ministry) of the United Arab Emirates (UAE) announced its intention to…
On 17 February 2023, the High Court of New Zealand has delivered a judgment on a dispute between a New Zealand legal entity and a major bank of Australia and New Zealand.
The plaintiff, a legal entity deeply engaged in investments in luxury real estate in New Zealand since 2016 (“Entity”) had a bank account in a major Australian and New Zealand bank group (“Bank”).
When, in April 2022, a Russian citizen, a supposed ultimate beneficiary of this New Zealand investment vehicle (the Entity) through a complex corporate structure, was designated as an “oligarch” and sanctioned by multiple jurisdictions, including some restrictions on this Russian citizen imposed by New Zealand, the Bank has notified the Entity that it withdraws from providing banking services and closes its accounts.
Prior to that, the Bank and the Entity were engaged in correspondence, during which the Entity rejected any allegations of an existing connection between it and the mentioned Russian citizen. The plaintiff sought a breach of contract claim. The court has determined in this case whether the Bank was entitled to close the Entity’s bank accounts and withdraw from any services, i.e. whether the Bank had “reasonable grounds for doing so”.
Bearing on consideration that the connection between the investment vehicle and the said Russia citizen was not objectively established, and considering that, since March 2022, this person ceased to be even a non-direct beneficiary of the trust, the Court has considered the following: this case is not about the existence of a connection between the sanctioned Russian individual, or whether it controls or controlled the Entity. It is about whether the Bank – pursuant to the wording of the banking agreement – is entitled to terminate its relations with a client in case when the maintaining such relations compromise the bank’s own status as a major financial institution.
The court concluded that it does not matter whether the risks that the Bank sees are real, namely the regulatory risks (possible breach of sanctions regimes), contract risks (the Bank undertakes in its contracts to comply with the applicable sanctions’ regime), or capital market risks (the Bank’s clients may decline to deal with the Bank).
What matters is that the Bank was entitled to do so simply because it detected “a reasonable ground for that”, and, in doing so, it did not breach its own internal regulation nor the banking agreement, simply exercising its right to terminate the contract if it so deems necessary in face of multiple risks. Nor it did not breach the Entity’s rights because “it did not rush to terminate, it sought information from the Entity, and it made other inquiries”, moreover, the Bank has provided the Entity with the extensions to the terminated date for the Entity to collect all the necessary documents.
This concept draws our interest because of the following: even though the sanctioned individual or entity may be a former beneficiary, or even if it may be otherwise connected to an entity (whether it is an investment vehicle or a company conducting lawful business outside of Russia) in the past, the banks’ compliance may still recognize this as a reason for termination of contract and withdrawal from providing banking services.