Termination of customer relations according to Section 24 fourth paragraph of the Money Laundering Act

For many companies subject to reporting obligations under the Money Laundering Act, it can be demanding to terminate existing customer relationships. Many are unsure of what is required for it to be said that "customer measures as part of ongoing follow-up cannot be carried out", cf. Money Laundering Act § 24. The question of the obligation to terminate customer relationships came to the fore in a decision (ruling) from the Court of Appeal towards the end of 2023 (LB-2023-167922). The case has been appealed to the Supreme Court, which will hear the case during 2024.

Briefly about the case

An insurance company discovered transactions linked to two policyholders, which led to questions being asked about their ownership. The policyholders were two farming companies that were previously owned by a Russian farming company. In connection with the extensive sanctions against Russia following their full-scale invasion of Ukraine, the ownership of the two farming companies was transferred to a Norwegian holding company with a Norwegian citizen as sole owner.

The insurance company considered the companies' ownership to be unclear and believed that the customer measures could not be carried out as a result. The farming companies filed a claim for a temporary injunction to prevent termination of the insurance contracts until the issue of liquidation had been legally decided. 

The Court of Appeal came to the conclusion that there was no liquidation obligation under section 24 fourth paragraph of the Money Laundering Act. In their assessment, emphasis was placed on the fact that the farming companies had answered the insurance company's questions and submitted the requested documentation. That the insurance company doubted the reality of the property transfer was primarily a risk the insurance company had to manage and not reject. The Court of Appeal writes, among other things, the following about this:

"As the Court of Appeal has touched on, the liquidation obligation according to Section 24, fourth paragraph of the Money Laundering Act, is reserved for cases where the risk cannot be identified. When the risk has been uncovered, or can be uncovered, there is no obligation to liquidate, but an obligation to adapt customer measures and ongoing follow-up to the risk that has been identified. As this injunction case is disclosed, the Court of Appeal cannot therefore see that one is here in a situation where the winding-up obligation is applicable"

LB-2023-167922

What is the main purpose of the Money Laundering Act?

A central point in the Court of Appeal's assessment was what is the main purpose of the Money Laundering Act. On that occasion, the Court of Appeal agreed with Jon Petter Rui's statement in Journal of business law 2023/1. Here it is stated that "the main purpose of the Money Laundering Act is that reporting parties must obtain as much intelligence information as possible with the highest possible quality". The article is based on a legal opinion written by Rui on behalf of a party. The same description of the main purpose is also included in the commentary edition to the Money Laundering Act (Rui, Ringen and Rørholt, pp. 55-56). 

In our view, it is highly doubtful whether this description of the main purpose is comprehensive or applicable as a point of interpretation for the provision in section 24, fourth paragraph, on termination of customer relations.

The main purpose of the Money Laundering Act is stated in Section 1 of the Money Laundering Act:

(1) The purpose of the Act is to prevent and detect money laundering and terrorist financing.

(2) The measures in the Act shall protect the financial and economic system as well as society as a whole by preventing and uncovering that reporting obligations are used or attempted to be used as part of money laundering or terrorist financing.  

Section 1 of the Money Laundering Act

It is difficult to see that the main purpose should be understood as the Court of Appeal has assumed. Prevention of money laundering is carried out precisely by reporting obligations refusing to carry out transactions or establish customer relationships with customers who abuse the financial system to commit money laundering. The customer measures are absolutely central to discovering that the customer uses services and products from the reporting party in ways other than what the customer has informed. In the Finanstilsynet's guide (No. 4/2022 ch. 5.2) it is stated that the Money Laundering Act of 2018, in contrast to previous legislation, no longer has a "requirement to demonstrate that the continuation of the customer relationship entails a risk for transactions related to the proceeds of criminal acts or terrorist financing .” 

On the other hand, an interpretation of the main purpose that the Court of Appeal has set as a basis may indicate that those obliged to report should maintain the customer relationship and carry out suspicious transactions, including transactions which probably constitutes money laundering, in order to provide EFE with the best possible intelligence information. We are afraid that this view could undermine the main purpose of the law and lead to those obliged to report allowing the customer to abuse the financial system for money laundering, for fear of making a mistake or terminating the customer relationship without sufficient factual reason. 

What should reporting parties do if they do not trust the customer's explanation?

If the Court of Appeal's decision is upheld, it means that reporting parties should be careful not to terminate customer relationships where they doubt whether the information provided by the customer is correct. It will probably weaken the main purpose of the Money Laundering Act as described in Section 1 of the Act.