Appealing Bank Account Freezing (Blocking) under Russian Anti-Money Laundering Law

 

May 30, 2024

BRACE Law Firm ©

 

Federal Law No. 115-FZ dated August 7, 2001, On Counteracting the Legalization (Laundering) of Criminally Obtained Incomes and the Financing of Terrorism (the "Federal Law No. 115-FZ"), aims to protect the rights and legitimate interests of citizens, society, and the state by creating a legal mechanism to counter the laundering of criminally obtained proceeds, the financing of terrorism, and the financing of the proliferation of weapons of mass destruction.

This article examines the procedure and methods for appealing a bank's decision to apply restrictive measures taken against clients under Federal Law No. 115-FZ.

Why Does a Bank Freeze (Block) Funds?

Provision of the Bank of Russia No. 375-P dated March 2, 2012, On Requirements for Internal Control Rules of a Credit Institution for the Purpose of Counteracting the Legalization (Laundering) of Criminally Obtained Incomes and the Financing of Terrorism (the "Provision No. 375-P"), approved specific requirements for internal controls.

Provision No. 375-P establishes a list of signs indicating the unusual nature of a transaction to identify operations suspected of being carried out for money laundering or terrorist financing, including signs indicating potential money laundering during cash operations and funds transfers.

These signs may include the convoluted or unusual nature of an operation (transaction) that lacks obvious economic sense or an obvious legal purpose, or an inconsistency between the operation (transaction) and the organization's goals established by its constituent documents. Other signs include a discrepancy between the nature of the client's operation (transaction) and the activities declared during or during the course of service, an obvious contradiction between operations conducted by the client (or their representative) and general market practice, or a significant increase in funds in the account — uncharacteristic of the client's normal activities — which are then transferred to an account in another credit institution or to another person's account within a short period.

If clients violate the requirements of Federal Law No. 115-FZ, the bank faces regulatory risks of license revocation and termination of activities. The inability to obtain information from clients creates risks not only for a specific bank but for the entire banking sector.

Federal Law No. 115-FZ contains a list of situations where a bank must inform its clients about the application of the following restrictive or refusal measures:

• measures taken to freeze (block) funds or other property;
• suspension of an operation;
• refusal to accept a client for service;
• refusal to execute a client's order to perform operations;
• refusal to enter into a bank account (deposit) agreement;
• termination of a bank account (deposit) agreement and the reasons thereof;
• the need to provide documents;
• suspension or termination of the use of an electronic means of payment, specifying the reasons for such suspension or termination.

Upon a client's request, a financial organization must inform them of the reasons for the restrictions to an extent sufficient for the client's rehabilitation and removal from the "black list". [1]

Contacting the Bank Regarding the Blocking of Funds in an Account

If a bank refuses to enter into a bank account (deposit) agreement or to conduct an operation, the client must obtain information from the bank regarding the reasons for the refusal. Under Article 7, Clause 13.1-1 of Federal Law No. 115-FZ, the bank must provide information on the date and reasons for the refusal decision no later than five business days from the date of such decision.

After receiving information about the reasons for the refusal, if the bank has not specified which documents it requires to review its decision, we recommend selecting documents that demonstrate the absence of grounds for refusal and submitting them to the bank with a request to reconsider the previous decision.

The bank must notify the client of its decision following the review of the documents within seven business days of their submission (Article 7, Clause 13.4 of Federal Law No. 115-FZ). Based on the review of the submitted documents, the bank may independently decide to eliminate the grounds for the previous refusal or uphold the refusal decision.

Notably, a client is not limited to a single attempt when requesting a review of a refusal decision. If new circumstances or documents come to light, the client may assemble a new package of documents and resubmit them to the bank for consideration.

Appealing Blocking under 115-FZ to the Interdepartmental Commission Established under the Bank of Russia

If contacting the bank and providing additional documents proves unsuccessful and the bank does not change its refusal decision, the client may appeal the bank's decision to the Interdepartmental Commission established under the Bank of Russia (the "Interdepartmental Commission").

The requirements for applications, the procedure and deadlines for the Interdepartmental Commission's review of applications and documents (or information), the decision-making process, and the notification procedure are governed by Provision of the Bank of Russia No. 795-P dated June 23, 2022 (the "Provision No. 795-P").

The Interdepartmental Commission includes representatives from the Bank of Russia and Rosfinmonitoring. With the participation of the Federal Customs Service, the Presidential Commissioner for the Protection of Entrepreneurs' Rights, and various public organizations and banking associations, the Commission reviews applications from persons classified by the credit institution and the Central Bank of the Russian Federation as belonging to a high-risk group for suspicious transactions regarding:

• failure to conduct operations to debit funds from a bank account (deposit), to reduce electronic money balances, to transfer funds via the Bank of Russia's Faster Payments System, to withdraw cash, or to conduct operations with other property;
• failure to return the remaining balance upon termination of a bank account (deposit) agreement or failure to transfer it to another account of the client or a third party as directed by the client;
• termination of the client's ability to use electronic means of payment.

The Interdepartmental Commission reviews appeals against:

• a bank's decision to refuse to enter into a bank account (deposit) agreement;
• a bank's decision to refuse to perform an operation.

The following are not subject to appeal before the Interdepartmental Commission:

• restrictions on Remote Banking Services (the "RBS") or the blocking of a bank card;
• refusal to issue or reissue a bank card;
• termination of a bank account agreement at the bank's initiative;
• a bank's refusal to terminate a bank account agreement;
• commissions charged by the bank and its tariff policy;
• decisions to refuse to enter into a bank account (deposit) agreement or perform an operation if there are suspicions that the purpose is money laundering or terrorist financing;
• termination of a bank account (deposit) agreement if two or more decisions to refuse an operation were made within a calendar year based on suspicions of money laundering or terrorist financing;
• decisions to refuse a loan.

Please note that the Interdepartmental Commission does not review appeals if the client has not first gone through the appeal process within the bank.

An application may be submitted to the Interdepartmental Commission through one of the following methods:

• via the Bank of Russia's online reception, selecting the topic "Appeal to the Interdepartmental Commission established in accordance with 115-FZ" (documents may be sent in multiple compressed submissions);
• delivering the application and documents to the Bank of Russia's dispatch office at 3 Sandunovsky Pereulok, Bldg. 1, Moscow;
• sending the application and documents via Russian Post to 12 Neglinnaya St., Bldg. V, Moscow, 107016.

A decision to refuse to enter into a bank account (deposit) agreement or to perform an operation may be appealed regardless of the date it was made. The appeal must be addressed to the Interdepartmental Commission and must include the information and documents required by Provision No. 795-P:

• client identification details (full name, date of birth, SNILS, organization name, INN, etc.);
• details of the specific refused operation (date, payment document number, amount, counterparty);
• details of the bank that made the refusal decision;
• documents proving the authority of the person signing the application, including all pages of their identification document;
• the bank's notice stating the impossibility of eliminating the grounds for the previous refusal;
• documents submitted to the bank to eliminate the grounds for the refusal.

For an objective and comprehensive review, we also recommend submitting information and documents marked "submitted at the applicant's discretion". If any information or documents are missing, the applicant should state this in the application to the Interdepartmental Commission.

Clients classified by the credit institution and the Bank of Russia as high-risk may appeal the following measures within six months from the day following the receipt of the bank's notice of the measures:

• failure to conduct operations to debit funds from a bank account (deposit), to reduce electronic money balances, to transfer funds via the Bank of Russia's Faster Payments System, to withdraw cash, or to conduct operations with other property;
• failure to return the remaining balance upon termination of a bank account (deposit) agreement or failure to transfer it to another account or to a third party;
• termination of the client's ability to use electronic means of payment.

If the bank sent the notice via RBS, bank chat, or email, the date of receipt is the day following the date the bank sent the information. If sent by registered mail, the date of receipt is the sixth day from the date the bank sent the notice.

The Bank of Russia will leave an appeal without consideration on the merits if the six-month filing period has expired.

Note that the application of these measures may only be appealed in court after the applicant has first appealed to the Interdepartmental Commission.

An appeal against such bank measures must include:

• client identification details (full name, date of birth, SNILS, organization name, INN, etc.);
• the date the bank applied the contested measures;
• the date the client received the bank's notice of the contested measures;
• details of the bank whose measures are being appealed;
• documents proving the authority of the person signing the application, including all pages of their identification document;
• the bank's notice of the application of the contested measures;
• the applicant's financial reporting indicators;
• documents demonstrating the absence of grounds for the contested measures.

If any information or documents are missing, this should be noted in the application.

The Bank of Russia will leave an application without consideration on the merits under the following circumstances:

• the application does not comply with the requirements of Provision No. 795-P;
• unreliable information about the applicant is detected;
• the application contains profane or insulting language, or threats to the life, health, or property of the Commission's representatives or other persons;
• the text is illegible or the essence of the application cannot be determined;
• a previous decision by the Interdepartmental Commission exists regarding the same applicant and the same subject matter.

The Interdepartmental Commission makes its decision in absentia or through an in-person meeting. At the discretion of the Commission's Chairperson, the applicant or their representative may attend the in-person meeting.

The total review period for the application and documents cannot exceed 20 business days from the date of the appeal. Notice of the Commission's decision must be sent to the applicant and the bank within three business days of the decision. Notice is sent by email for online submissions or by post for paper submissions.

A decision made by the Interdepartmental Commission regarding an appeal against a refusal or a measure is not subject to review.

If the decision favors the applicant, the bank must conduct the disputed operation or enter into the bank account (deposit) agreement. If the decision favors the bank, the only remaining option is to file a lawsuit in an Arbitration Court to recognize the bank's actions as illegal or to seek other remedies to restore the violated rights.

Notably, neither Federal Law No. 115-FZ nor other regulations provide for the possibility of appealing the Interdepartmental Commission's decision. While some plaintiffs attempt to challenge the Commission's decisions in court, these attempts generally result in the dismissal of the claims.

For example, in Case No. A40-192423/2019, an application was filed to challenge the Interdepartmental Commission's decision to uphold a bank's refusal to enter into a bank account (deposit) agreement. During the proceedings, the courts found that the Commission's decision took into account that "the Applicant's head and founder failed to explain the business's goals or product costs during telephone verifications, and the employment contract for the director was concluded before the Applicant was entered into the Unified State Register of Legal Entities (the 'USRLE'), i.e., before its legal capacity arose". Consequently, the courts correctly concluded that the Commission's decision was legal and well-founded, and properly dismissed the claims. [2]

Appealing Blocking under 115-FZ in Court

The Supreme Court of the Russian Federation rarely addresses this category of disputes. Despite the large volume of cases, cassation appeals are seldom transferred to the Judicial Chamber for Economic Disputes; therefore, key legal positions of Arbitration Courts are primarily formed at the level of district courts. This results in numerous disputes, an analysis of which follows.

Specifically, bank clients file the following types of claims:

• to recognize the bank's unilateral termination of a bank account agreement as illegal;
• to recognize the bank's refusal to conduct operations on the account as illegal;
• to recover statutory compensation for damage to business reputation caused by the bank;
• to recover interest for the use of another person's funds;
• to compel the bank to restore RBS services;
• to recover penalties (fines);
• to compel the bank to close the settlement account and transfer the remaining balance to the applicant's account in another bank.

The subject matter of specific case categories determines their procedure and procedural features.

Refusal to Execute a Client's Order

Under Article 848 of the Civil Code of the Russian Federation (the "Civil Code"), a bank must perform operations on a client's account; however, the law may provide cases where a bank must refuse to credit or debit funds. One such ground is the right established by Article 7, Clause 11 of Federal Law No. 115-FZ, which allows a bank to refuse a client's order "if the bank's employees suspect that the operation is being carried out for money laundering purposes".

In judicial proceedings to recognize a bank's actions to restrict fund management as illegal, banks "bear the burden of proving the circumstances that served as the basis for the contested action". [3] Courts have found the failure to meet this burden as grounds for granting a company's application. This obligation persists despite the fact that suspicions alone are sufficient to apply anti-money laundering measures under Federal Law No. 115-FZ.

Regarding suspicions, courts note that a bank's control functions should not be aimed at identifying any legal violations by the client or forcing the client to disclose all information about their activities, including information indirectly related to operations deemed suspicious. The bank should exclusively verify suspicious operations for their connection to money laundering. "Otherwise, the bank's actions diverge from the goals and objectives of Federal Law No. 115, and its powers are essentially used to control the client and force the disclosure of information even when operations are not related to money laundering or terrorist financing. If the limits of the powers granted by Federal Law No. 115 are exceeded, this constitutes interference in entrepreneurial activity". [4]

As seen in the court records for Case No. A40-15380/2023, a client submitted a paper payment order to transfer the entire remaining balance as a single tax payment to the Federal Treasury. However, the bank refused to execute the order, deeming the transfer to the budget system suspicious. The courts, "finding that the defendant, based on information from the Bank of Russia, classified the plaintiff as a high-risk group for suspicious transactions and subsequently requested supporting documents, which the plaintiff failed to provide, concluded that the refusal to execute the payment order was lawful as the plaintiff failed to prove the bank's actions were illegal". [5]

In a similar case, No. A43-7866/2020, the courts granted the plaintiff's claim to recognize the refusal as illegal and compelled the bank to execute the operation. The courts found that the plaintiff had submitted the requested documents and explanations, and the bank had not requested any additional information. After evaluating the evidence, the courts concluded that there was "insufficient evidence of the transit nature of the operations or any convoluted or unusual character of the transactions lacking obvious economic sense, and thus the bank had no grounds to refuse the client's order". [6]

Refusal to Enter into a Bank Account Agreement

Under Article 846, Clause 2 of the Civil Code, a bank must enter into a bank account agreement with a client who offers to open an account under the bank's standard terms. However, Article 7, Clause 5.2 of Federal Law No. 115-FZ provides an exception — the bank may refuse if it suspects the agreement is being entered into for money laundering purposes.

In Case No. A28-1197/2021, the bank refused to open an account because the company had a minimum authorized capital, the founder and head were the same person, and another credit institution had previously refused to open an account for the company. The first-instance court granted the claim, finding the bank's assertions unproven. The district court, upholding the decision, stated that a refusal must not be formal. "To avoid a formal refusal, circumstances indicating that the client's purpose is money laundering must be verified by the credit institution through an analysis of additional information, submitted documents, the client's explanations, and the behavior of the client and their representatives". [7]

Conversely, some cases support the banks. In Case No. A56-45076/2019, the courts found that the bank had sufficient legal grounds for refusal after analyzing factors such as minimum authorized capital, registration in a residential property, the short period between the company's creation and its application to the bank, and the fact that the participant and head were the same person. [8]

RBS Restrictions under 115-FZ

Modern banking is nearly impossible without electronic means of payment, including bank cards, mobile apps, and software systems providing RBS access.

Article 858 of the Civil Code stipulates that restricting a client's right to manage funds in an account is not permitted, except for the attachment of funds or the suspension of operations as provided by law.

Including a bank's right to restrict a client's RBS access in bank account agreements is a widely used tool for anti-money laundering.

In Case No. A40-225756/2019, where the bank blocked RBS access and fund management, the courts found the bank's actions lawful after the plaintiff's operations were deemed suspicious. The court stated that "the RBS system is an additional service to the agreement between the bank and the client, which the bank may restrict in the event of unusual operations to counter money laundering, which does not contradict Russian law". [9] It was also noted that "the bank did not prevent the client from using or managing funds by submitting paper payment orders, as provided by the agreement and the law". [10]

In Case No. A40-84061/2020, the courts found that the plaintiff's transactions were real and conducted for business purposes. The plaintiff had fulfilled the bank's requests for information, and the bank had not requested further documents. Nevertheless, RBS access was not restored. The courts ruled the bank's failure to act illegal, stating that "restoring access to the account via the RBS system is a method of protecting a violated right provided by Article 12, Paragraph 3 of the Civil Code — namely, restoring the position that existed before the violation". [11]

In Case No. A60-5382/2021, the courts found that "the documents and explanations provided by the plaintiff indicated normal economic activity; however, the bank failed to specify the specific circumstances for suspending RBS access, citing only the general provisions of Federal Law No. 115-FZ". The bank failed to prove that the operations were illegal or unusual. The courts found the bank's actions contradictory, as "while claiming operations were suspicious, the bank did not refuse them, but still suspended RBS services and failed to request additional documents or restore service". [12]

Clients often seek statutory compensation for moral harm and damage to business reputation alongside their main claims, but courts generally deny these. In Case No. A51-8649/2020, the court stated there were no legal grounds for such compensation. Under Article 151, Clause 1 of the Civil Code, moral harm relates to physical or mental suffering. The court noted that "current legislation does not provide for the recovery of moral harm in favor of a legal entity". Regarding business reputation, the plaintiff "failed to provide evidence that the bank disseminated unreliable information about the plaintiff in print or online; all documents were sent to the plaintiff personally". [13] There are no known cases where such claims were granted.

Prohibitive Tariffs

The application of prohibitive tariffs (increased commissions on banking operations deemed suspicious by the bank) during operations or account closure is a pressing issue.

Currently, there is no uniform definition of a "prohibitive tariff" in legislation or practice. It may refer to various types of commissions whose size and terms are formulated individually by banks.

However, several distinctive features of prohibitive tariffs can be identified:

• they are charged for specific types of operations or transfers to specific categories of persons as defined by the bank;
• they are justified as anti-money laundering measures agreed upon by the parties;
• they significantly exceed the standard commission amount. [14]

One of the few mentions of the term "prohibitive tariff" is in Clause 6.6.3 of the Standard Internal Control Rules for a Credit Institution, published by the Association of Russian Banks on March 13, 2013: "For clients with a critical risk level, measures of a prohibitive nature (a prohibitive tariff) may be applied if such measures are provided for in the bank's current tariffs".

The Supreme Court of the Russian Federation consistently maintains that establishing prohibitive tariffs is an illegal and bad-faith action by banks.

In Ruling of the Judicial Chamber for Civil Cases of the Supreme Court No. 16-KG18-57 dated April 2, 2019, the court concluded that Law No. 115-FZ does not contain provisions allowing credit institutions to set special commissions as anti-money laundering measures. [15] Furthermore, a bank account agreement provision allowing a bank to charge an increased fee for a suspicious operation contradicts the essence of legislative regulation and is void. [16]

The Bank of Russia has also instructed credit institutions to:

• avoid including provisions in bank account and deposit agreements that allow the bank to unilaterally increase or establish commissions;
• avoid charging consumers increased or unilaterally established commissions without the client's express, informed, and conscious consent to the new tariffs. [17]

In Case No. A60-67186/2022, the courts correctly ruled that "a credit institution's performance of a public control function cannot be used in private law relations as a way to extract profit in the form of a fine for the failure to submit documents requested by the bank". [18]

In Case No. A40-82735/2022, the courts added that the bank's reliance on the principle of freedom of contract and Articles 421, 428, and 431 of the Civil Code must be rejected, as the contractual condition for the commission upon closing the account is void and inapplicable. [19] In Case No. A31-1696/2020, the court found such a measure "unfair and clearly burdensome for the client, violating the economic interests of the client as the weaker party to the transaction". [20]

However, despite the Supreme Court's position, some court decisions still diverge. The banking industry often argues that prohibitive tariffs are necessary when clients refuse to provide requested documents. According to banks, the goal is to make suspicious operations economically unfeasible and deter future attempts. In this sense, Federal Law No. 115-FZ and the resulting anti-money laundering systems can be seen as measures to stimulate lawful behavior. [21]

In Case No. A40-10864/2020, the court found that the plaintiff's operations showed signs of transit movement. The court stated that "the commission withheld by the bank was agreed upon by the parties when signing the agreement, does not contradict legislation, and was not challenged by the plaintiff; therefore, the funds do not constitute unjust enrichment". [22]

In Case No. A40-195846/2018, the courts refused to view a commission charged upon account closure for suspicious operations as unjust enrichment, but agreed that Article 333 of the Civil Code on the reduction of penalties applied. The courts noted that the commission had a punitive rather than compensatory nature and reduced it to 1% of the remaining balance to ensure a balance between the parties. [23] However, in Case No. A65-29011/2019, the Arbitration Court of the Volga District disagreed with applying Article 333, stating that the plaintiff "erroneously classified the withheld funds as a penalty" when the commission was provided for by the agreement and tariffs. [24]

Analysis of court practice shows that refusals to conduct operations or open accounts are often linked to the client's failure to provide requested documents and information.

When identifying suspicious operations, a bank may:

• request (or additionally request) documents and information from the client (e.g., regarding the operation, source of funds, counterparties, or the reality of business activities);
• use other information sources;
• set a deadline for submitting the requested information (pursuant to the agreement and internal rules);
• invite the client to the bank for an oral explanation;
• visit the client's place of business;
• decide to review the client's risk level;
• restrict (limit) RBS and the use of bank cards.

When preparing a response to a bank's request, we recommend adhering to the specified deadlines and providing written explanations along with a maximum list of documents to clarify the economic sense of the operations.

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References

1. Informational Letter of the Bank of Russia No. IN-014-12/61 dated September 12, 2018, On Issues of Application of Federal Law No. 115-FZ dated August 7, 2001, On Counteracting the Legalization (Laundering) of Criminally Obtained Incomes and the Financing of Terrorism in Terms of the Functioning of the Client Rehabilitation Mechanism.
2. Decree of the Arbitration Court of the Moscow District dated July 6, 2020, in Case No. A40-192423/2019.
3. Ruling of the Supreme Court of the Russian Federation dated October 22, 2019, in Case No. A40-137121/2018.
4. Decision of the Arbitration Court of the Krasnoyarsk Territory dated December 23, 2020, in Case No. A33-34880/2019.
5. Decree of the Arbitration Court of the Moscow District No. F05-19527/23 dated August 18, 2023, in Case No. A40-15380/2023.
6. Decree of the Arbitration Court of the Volga-Vyatka District dated April 30, 2021, in Case No. A43-7866/2020.
7. Decree of the Arbitration Court of the Volga-Vyatka District dated January 18, 2023, in Case No. A28-1197/2021; Decree of the Arbitration Court of the Central District dated April 24, 2019, in Case No. A62-4172/2018.
8. Decree of the Arbitration Court of the North-Western District No. F07-7004/2020 dated June 23, 2020, in Case No. A56-45076/2019.
9. Decree of the Arbitration Court of the Moscow District dated June 8, 2020, in Case No. A40-225756/2019.
10. Decree of the Arbitration Court of the Moscow District dated July 9, 2020, in Case No. A40-211148/2019.
11. Decree of the Ninth Arbitration Appellate Court dated December 16, 2020, in Case No. A40-84061/2020.
12. Decree of the Arbitration Court of the Urals District No. F09-7640/21 dated November 25, 2021, in Case No. A60-5382/2021.
13. Decree of the Arbitration Court of the Far Eastern District dated December 14, 2021, in Case No. A51-8649/2020.
14. Efremov V.V., Zavyalov S.O., Economic Measures to Counteract Legalization: Analysis of Judicial Practice, Bulletin of Economic Justice of the Russian Federation, 2020, No. 12.
15. Review of Judicial Practice of the Supreme Court of the Russian Federation No. 4 (2019) (approved by the Presidium of the Supreme Court on December 25, 2019).
16. Review of Judicial Practice of the Supreme Court of the Russian Federation No. 1 (2021) (approved by the Presidium of the Supreme Court on April 7, 2021).
17. Informational Letter of the Bank of Russia No. IN-03-59/82 dated June 14, 2022, On the Inadmissibility of Unilateral Increase/Establishment of Commissions under an Agreement with a Consumer.
18. Decree of the Arbitration Court of the Urals District dated September 29, 2023, in Case No. A60-67186/2022.
19. Decree of the Arbitration Court of the Moscow District dated February 2, 2023, No. A40-82735/2022.
20. Decree of the Second Arbitration Appellate Court dated April 21, 2021, in Case No. A31-1696/2020.
21. Efremov V.V., Zavyalov S.O., Economic Measures to Counteract Legalization: Analysis of Judicial Practice, Bulletin of Economic Justice of the Russian Federation, 2020, No. 12.
22. Decree of the Arbitration Court of the Moscow District dated April 6, 2021, in Case No. A40-10864/2020.
23. Decree of the Arbitration Court of the Moscow District dated August 12, 2019, in Case No. A40-195846/2018.
24. Decree of the Arbitration Court of the Volga District dated August 6, 2020, in Case No. A65-29011/2019.