Court analyses the binding nature of OFAC sanctions on Maltese banks

On 29 September 2020, the First Hall Civil Court, presided by Mr. Justice Toni Abela, ruled in the case World Water Fisheries Limited – C24129 (“WWFL”) vs Bank of Valletta plc. (“BOV”), that the defendant bank has no legal right to arbitrarily and unilaterally restrict its customers from withdrawing their deposits, on the basis of sanctions imposed by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”).

Back in 2018, BOV froze the applicant company’s deposit monies, amounting to €99,080.57, in consideration of the fact that WWFL was listed as one of the sanctioned entities in the OFAC sanctions list and the respective guidance note (the “Guidance Note”) issued by the Malta Sanctions Monitoring Board (“SMB”). To this effect, the Company petitioned the Court to compel the Bank to release said funds, claiming that sanctions issued by the United States of America are not enforceable in Malta (be it a sovereign and an independent state) or in the European Union.

In its replies, BOV hammered home the point that for it to be able to maintain its international banking operations, particularly its relationships with foreign correspondent credit institutions operating in the US dollar market, it is obliged to abide by inter alia the economic sanctions and guidance issued by OFAC. Furthermore, BOV alluded to the potential grave consequences which it could itself end up facing (together with the Maltese banking system in generally) if it refuses to cooperate with OFAC.

In examining the facts and in analysing whether BOV’s actions were justified and grounded in law or in contract, the Court delved into two legal points

  1. the applicability of the National Interest (Enabling Powers) Act, Chapter 365 of the laws of Malta (the “Act”), in the context of this case; and
  2. independently of point (a) above, whether BOV was justified to freeze the applicant’s assets in light of international banking practice and contract law.

Primarily, the Court made reference to the Guidance Note issued by the Sanctioning Monitoring Board, which board is established ipso jure through Article 7 of the Act, and outlined that at no point in time does the SMB, through its Guidance Note, order the freezing of assets – conversely, the board merely recommends that institutions should be on the lookout when dealing with such entities. The Court highlighted the SMB strongly recommended that all economic operators and financial institutions in Malta exercise extreme caution and enhanced due diligence when dealing with property belonging to entities which are flagged by OFAC. Moreover, from Article 3(4)(a) of the Act it emanates that such power to freeze, block or restrict the use of a person’s assets, is exclusive to the Minister responsible for foreign affairs, on the recommendation of the SMB and the Attorney General, making the Bank’s freezing of the company’s assets ultra vires.

Secondly, in assessing BOV’s argument that its actions where rooted in international practice, the Court noted that the bank’s risk in ending up as a sanctioned entity itself and denied access to the American Dollar, if it allowed the withdrawal of the applicant’s deposits. In its considerations, the Court revisited the principles behind the nature of the bank-customer relationship and outlined that the relationship is contractual and is regulated by express and implied and unwritten terms. In such context, it emanates that there was no express condition on the bank account terms and conditions which states that deposits can be blocked or frozen as a consequence of OFAC sanctions. Had the applicant company been made aware of such a condition upon the opening of the bank account, there would be no issue with the imposition of any freezing order as the principle of pacta sunt servanda would kick in. Refering to UK jurisprudence, Joachimson vs Swiss Bank Corp, the Court highlighted that (i) there are several key terms which are to be implied into the banker-customer contract because of the very nature of that relationship and (ii) the Courts will only imply a term into a contract strictly where the term:

  • is necessary to give business efficacy to the contract,
  • was so obviously a stipulation in the agreement that it goes without saying that the parties must have intended it to form part of their contract,
  • has become standardised in a particular type of contract, and
  • is implied by the custom is a locality of the usage of a particular trade.

The Court further cites caselaw which provide that usage of bankers becomes an implied term in a banker-customer contract (whether or not the customer is aware of it) when it is certain, notorious and reasonable and which does not derogate from the customer’s substantial rights. Furthermore, reference was made to directives issued by the Malta Financial Services Authority, wherein the regulator although recommending licence holders and the public in general to bear them in mind, states that US sanctions are not legally binding in Malta (unlike United Nations and European sanctions).

In light of the facts of the case and the evidence produced by the parties, the Court held that BOV’s actions were not tantamount to international banking practice or usage and therefore cannot be implied in the banker-customer contract. WWFL was never made aware that its assets can be frozen as a result of OFAC sanctions and had no means of knowing, unless such action was clearly and specifically stipulated in the contact. Consequently, the Court held that since BOV had no legal basis for its actions, the defendant bank had to release the funds to WWFL, together with any interest applicable at law.

This judgement is notable particularly because it sheds on the difference between express and implied terms in a bank-customer agreement. Service providers in the financial services sector, ought to ensure that any terms and conditions which they have in place with their clients, are clear, unambiguous and most importantly which do not assume or imply any equivocal terms, thereby tilting further an imbalance between the commercial strength of the service provider and that of the customer. Comprehensive framework contracts would ensure fairness and transparency in the relationship between the parties, and would be essential in avoiding contentious consequences, akin to the one at hand.