Banks within rights to stop banking sanctioned Russian nationals

06 April 2023

The High Court has confirmed that Westpac New Zealand Limited (Westpac) was within its rights to block a customer connected to a sanctioned Russian oligarch in the context of Australian and New Zealand sanctions regimes against Russia.1

The judgment is welcome confirmation for banks that:

  • they can generally terminate banking services on reasonable notice, including where a sanctions risk arises; and
  • this general right is not unduly fettered by a “terminate on reasonable grounds” clause commonly found in standard terms, if a proper process is followed.

Westpac had identified a link between its customer Targa Capital Limited (Targa) and an individual sanctioned in Australia (Mr Alexander Abramov) and told Targa that it would be ceasing to provide banking services. Targa applied for an injunction to require Westpac to continue to be its banker.

We summarise the key points of the decision, comment on the broader context of the case, and provide an update on reporting requirements under the Russia Sanctions Act 2022.

Reasonable grounds for termination

Westpac’s terms provided that it could close Targa’s account or withdraw any products or services if Westpac “believes it has reasonable grounds for doing so” and has given Targa “at least 14 days’ notice…”.

Targa raised two arguments:

  • that Westpac had reasonably to believe that it had reasonable grounds; and
  • that Westpac was constrained by a clause requiring that it exercise any discretion under the terms of the contract in a “reasonable and consistent way”.

The Court’s findings in relation to these claims were:

  • that Westpac’s subjective belief was what mattered, and Westpac simply had to believe it had reasonable grounds for terminating the services; and
  • that Westpac had acted reasonably in both the process and the substance of its decision to terminate.

Key take-outs from the decision

Sanctions regimes broad in scope: Westpac was entitled to consider the risks to it from sanctions imposed in Australia against Mr Abramov, notwithstanding that Mr Abramov had not been sanctioned in New Zealand at the time. 

Proper processes: The Court gave weight to the fact that Westpac did not rush to terminate. It sought information from Targa, made other inquiries, and made the decision at a high level within Westpac. The Court also noted that Westpac engaged in correspondence with Targa once the decision was made and provided extensions to the termination date. 

Entitled to have regard to own legitimate commercial interests: Westpac was entitled, when exercising its discretion, to give due consideration to its legitimate commercial interests. Westpac identified regulatory, contract, and capital markets risks – the latter two being recognised by the Court as dependent on third party perceptions. The Court also noted that courts should be reluctant to find that a party has unreasonably assessed its own commercial interests.

Context of the decision

Reasonableness of banks’ handling of risks

Parallels can be drawn between this decision and the High Court decision in Ink Patch Money Transfer v The Reserve Bank of New Zealand2 last year. In that case, South Pacific money remitters had challenged the Reserve Bank’s actions, claiming that its guidance had effectively required banks to withdraw services from them. The Court demonstrated a reluctance to interfere with the right of banks to exercise their powers in assessing and managing risks in connection with obligations under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act).

Unconscionable conduct

Separate to the breach of contract claim, Targa’s second substantive claim was that closure of the accounts and withdrawal of banking services would be unconscionable conduct in breach of section 7 of the Fair Trading Act 1986 (FTA). Unconscionable conduct pleadings are relatively untested in New Zealand. Targa’s inclusion of this claim confirms expectations that unconscionable conduct can easily become a “bolt-on” additional claim to conduct that would contravene existing statutory and common law protections. 

The Court noted that section 7 of the FTA is relatively new and untested. Although it did not examine the section in detail, the Court referred to the description of unconscionable conduct in the Explanatory Note to the Fair Trading Amendment Bill 2019 as “serious misconduct that goes far beyond being commercially necessary or appropriate”. On that reading, the Court held that threshold had not been met (unsurprisingly given its findings that Westpac had acted reasonably).

Reporting requirements under the Russia Sanctions Act

New Zealand’s Russia Sanctions Act 2022 imposes obligations on “duty holders” (which include reporting entities under the AML/CFT Act, such as banks) to report if they suspect on reasonable grounds that they are in possession or immediate control of assets that are designated, owned or controlled by a designated person; or if they are dealing with services in relation to a sanctioned person. 

The Ministry for Foreign Affairs and Trade (MFAT) has published a guidance note for duty holders about these reporting requirements, setting out what to report, how to report, and the timing requirements for submitting a report. MFAT has also published a broader Regulatory Charter setting out practical guidance on compliance with the Russia Sanctions Act and Regulations.

Duty holders need to have the systems in place to comply with reporting obligations within the short timeframes set by the Act. MFAT has already signalled in the Report of its Post-Implementation Review that further work on an enforcement strategy is underway.

1. Targa Capital Limited v Westpac New Zealand Limited [2023] NZHC 230.

2. [2022] NZHC 1340.


Our thanks to Laura Green for her help with this article.

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