Client Sues Merrill for Closing Account Without Explanation
A longtime retail client of Bank of America and his daughter have filed a negligence and breach-of-contract suit against the bank and its Merrill Lynch brokerage unit for shutting down accounts they owned.
The lawsuit was filed this month in U.S. District Court for the District of Columbia by “an American citizen domiciled in Florida” who “is a well-known international figure with a political background, having served as the appointee of foreign governments,” according to the filing. The plaintiffs, a father and daughter identified as John and Jane Doe, are suing for reputational damages.
Their lawyer, Martin McMahon of Martin McMahon & Associates in Washington, would not reveal his clients’ identities.
A spokesman for Bank of America did not return a request for comment on the case.
The complaint highlights a growing acrimony between financial firms worried about violating increasingly rigorous money-laundering and know-your-customer rules, and customers who feel unjustly cut off from vital banking services. Advisors can be caught in the middle.
Financial institutions are becoming increasingly sensitive to potential problems they could face from working on international accounts, including money laundering and know-your-customer obligations. Customers who have lost access to U.S. bank and investment services range from money-transfer companies servicing lower-income Americans to legal marijuana dispensaries to diplomatic accounts.
“There’s been a wholesale purging of accounts,” said Peter Djinis, a founder of AML Compliance in Sarasota, Fla., and a former Treasury Department official. “There are a bunch of disgruntled clients out there.
“I’m surprised there hasn’t been a more high-profile case, where someone has questioned the soundness, the reasonableness, of having banking privileges withdrawn.”
McMahon, the plaintiffs’ lawyer, said it is likely that Merrill and BofA will try to dismiss the suit on the grounds that it is “frivolous” since companies have discretion about whether or not to service clients. Other lawyers agreed.
“It’s an uphill battle,” said Daniel Ruzumna, a partner at law firm Patterson Belknap in New York. “If they don’t want to do business with you, that’s their prerogative.”
Regulators have been focusing intensively on prosecuting banks and brokerage firms for violating anti-money laundering regulations. In 2012, HSBC Holdings reached a $1.9 billion settlement with U.S. authorities over allegations of money laundering for clients who ran drug cartels.
The Financial Industry Regulatory Authority in 2013 made anti-money laundering an examination priority. Last year, Oppenheimer & Co. paid $20 million to settle charges with the Securities and Exchange Commission and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) over AML-related issues. This month Miami-based broker-dealer E.S. Financial Services agreed to pay $1 million to settle SEC charges that it violated AML rules by failing to identify foreign owners of beneficially-owned accounts.
Banks and brokerage firms are no longer idly standing by. “They’ll look at account activity, and anything unusual they’ll close down,” said Ruzumna. “It happens all the time.”
RIAs GIRD FOR SCRUTINY
Next on the block are registered investment advisers. FinCEN is digesting comments on a proposed rule that would apply AML obligations to advisers regulated by the SEC. It requires them to establish formal AML programs and report suspicious activity to FinCEN.
“A lot of advisors are saying ‘What is this going to mean to me practically speaking,”’ said Thomas Bogle, a partner at Dechert LLP in Washington. “They may face some tough decisions when these AML rules go into effect.”
The lawsuit against Bank of America and Merrill Lynch alleges that John Doe had a BofA bank account for 34 years. His problems began when he tried to open a brokerage account with Merrill Lynch.
In doing a background check, Merrill apparently found a newspaper clipping or received a government memo suggesting that John Doe might have engaged in illegal activity, according to the complaint. The Does assert in the lawsuit that such a conclusion would be false.
The complaint also suggests that Merrill’s suspicions rose after learning that the Does owned a home in a foreign country that does not have strict anti-money laundering rules. Whatever the case, Merrill referred its suspicions to its parent bank, which then closed accounts held by the father and his daughter, according to the complaint.
The Does acknowledge in the lawsuit that they do not know what the bank and Merrill’s actual motives were in closing their accounts.
The lawsuit seeks damages of $250,000 to compensate the Does “for the embarrassment, reputational damage, and business-related damages” caused by the account closures and refusals. It also seeks a written explanation of why the accounts were closed.
The Does subsequently opened accounts at J.P. Morgan Chase,“after much difficulty, explaining and frustration,” according to the complaint.
Mason Braswell contributed reporting.