Debanking: A Bank's Legitimate Interest Prevails

Merciful Group Incorporated v Norfina Limited [2025] NSWSC 841

What you need to know

• The New South Wales Supreme Court has ruled that a bank was entitled to "de-bank" a customer to protect its legitimate interests, including where it held a rational honest opinion that there was an unacceptable money laundering/terrorist financing (ML/TF) risk.
• De-banking continues to attract significant political and legal focus given the need to balance the potential for entities to be left without access to critical banking facilities against the risks to banks from doing business with customers in a highly regulated environment.
• While turning on the interpretation of the particular terms and conditions, the case indicates that terms and conditions may permit a bank to terminate a relationship where it has a rational, honest belief that the level of ML/TF risk justifies termination. The bank may formulate that belief without putting allegations to the customer and giving them an opportunity to respond. It was not necessary for the bank to find that money laundering or terrorism financing had actually occurred.

What you need to do

• For banks, consider how the right to close an account is expressed in your terms and conditions and whether this reflects your risk appetite.
• Consider your AML/CTF Program and ML/TF risk assessment to determine whether this is appropriate in light of all aspects of your business. We would recommend considering this in light of the upcoming AML/CTF reforms.
• Ensure that decision-making around de-banking is documented in a way which enables a rational or proper purpose to be demonstrated to the court, if required.

De-Banking

The "de-banking" of customers (termination of the customer relationship, often for reasons related to regulatory or reputational risk) is increasingly common and has attracted political and legal focus. It raises difficult issues given the need to balance the risk that entities are left without access to critical banking facilities, against banks' needs to manage the risks to them of doing business with customers in a heavily regulated environment, including money laundering/terrorist financing (ML/TF) risks.

From a legal perspective, the key questions are:

• What (if any) restrictions apply to the bank's discretion to terminate the customer relationship?
• Assuming that such restrictions exist, what rationale(s) will suffice to justify termination?
• How can the basis for those rationales be evidenced, including having regard to secrecy provisions which may limit the bank's ability to disclose certain matters to the customer?

The latest from the Supreme Court

The New South Wales Supreme Court provided guidance on these questions in Merciful Group Incorporated v Norfina Limited [2025] NSWSC 841.

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.

In May 2025, the bank made a “risk based decision” and gave notice that it would close Merciful Group’s bank account as it was operating outside of the bank’s risk appetite.

Merciful commenced proceedings challenging the decision to close the account, obtained an interim injunction restraining the bank from terminating its banking facilities and moved to an expedited hearing of its contentions that the bank did not have a valid basis to terminate.

Limitations on the right to terminate

The bank's terms and conditions expressly restricted the right to terminate the customer relationship, entitling the bank to do so (among other things) to protect the bank's "legitimate interests" or where "we need to by law or to meet our prudential requirements".

"Legitimate interests" was defined as

"…legitimate business needs, prudential requirements and/or security requirements … and any requirements that are reasonably necessary to protect [the Bank] against a material risk of:

(a) a monetary default by [a customer] under a Credit Contract;

…

(d) [the Bank's] financial detriment.

Fourteen days' notice to the customer was required except in "exceptional circumstances" and had been given to Merciful.

Hammerschlag CJ considered that "legitimate interests" did not, at least in the context of the claim, require the bank to demonstrate a higher standard of "necessity" or "reasonable compulsion". It was necessary to point to an objectively legitimate interest as justifying termination – the termination had to have a rational justification.

There was no implied obligation on the bank, before terminating, to put the bank's concerns to the customer and give them an opportunity to answer them, or to establish that money laundering or terrorism financing had in fact occurred.

His Honour also doubted that there was an express or implied obligation that the decision to terminate be objectively reasonable (although, even if that were wrong, the bank had established that its decision was reasonable). It was sufficient under the Terms and Conditions for the bank to exercise a rational or bona fide judgment, or reach a rational honest opinion, that the customer's account should be closed.

Application of the limitations on termination

The judge considered that the bank had established a rational honest opinion that the customer's account should be closed, and also acted reasonably and for a proper purpose.

His Honour accepted that protecting against the risk of the bank's services being used for money laundering or terrorist financing, and associated risks of financial detriment, were legitimate business needs and prudential requirements, noting the risks of financial detriment from regulators, and of reputational harm.

As to whether the bank's particular concerns were legitimate, the Court had regard to a number of factors identified by the bank including:

• Merciful's account was used to receive substantial sums of money which were packaged into larger sums and sent via third party money remitters to countries which were considered high ML/TF risk.
• The bank's systems assessed the account as high risk.
• The source of wealth and source of funds for the charity was unable to be established through open source searches.
• Reported donations had increased 225% when the economic climate made this unusual.
• Merchant facilities were being used to process high value transactions.
• Large sums of money were being spent (by a charity) on high value luxury goods.
• Despite being a substantial operation, Merciful was incurring no business expenditure.
• There was an ostensible connection with people whose names matched individuals associated with crime.

Merciful in evidence provided an explanation for these matters, including that the charity's costs were funded by the principal associated with it so that every dollar donated went to charitable purposes and that while there were people connected with the charity with those names, they were different from those associated with crime identified by the bank.

The Judge did not make findings on those explanations. Rather, he considered that "Not only was the Bank under no obligation to engage with Merciful, it was not then and is not now required to believe what Merciful says or to accept its explanations."

The matters identified provided a reasonable justification for deciding to terminate the customer, even if they might be explicable.

Key Takeaways

The case continues the recent international trend towards emphasising that a bank has no general obligation to provide banking or financial services. It reiterates that the banker customer relationship is based on contract but is founded on trust and good faith in a commercial sense. When a bank finds its activities outside the bank's risk appetite, and its terms and conditions permit cessation of the relationship, it is not required to continue providing services to that customer.

For banks, it is important to consider the circumstances in which your terms give you the right to terminate your relationship with a customer. This case illustrates that a court will enforce a termination right that provides the bank with broad discretion to terminate to protect its legitimate interests, including by reference to other obligations such as prudential standards, and the bank's risk tolerance.

There must, however, be adequately drafted terms governing the relationship that contemplate what a bank's legitimate interests entail. Here, the Court accepted that the terms “legitimate business needs” and “financial detriment” were sufficiently broad to include steps taken due to concerns relating to money laundering and meeting obligations under the AML/CTF Act. It may be relevant to consider the breadth of any express right to terminate a banking relationship in this context and whether it sufficiently covers relevant scenarios.

Evidence of a rational or proper basis for terminating the relationship will also often be crucial. The position in this case can be contrasted with Human Appeal v Beyond Bank [2023] NSWSC 1161 where a bank was held to have no basis to terminate, in circumstances where it contended it could not lead evidence of the reasons for termination due to AML/CTF secrecy provisions. The moderation of the AML/CTF tipping off provisions as part of the recent AML reforms may make it easier for banks to explain their rationale to the courts, but it will be important that the position is carefully assessed and documented before notice of termination is given.

Other Authors: Nick Porter, Senior Associate and Caitlin Goodman, Lawyer.