Letter

AUSTRALIAN BANKERS’ ASSOCIATION INC.

Tony Burke Level 3, 56 Pitt Street

Director Sydney NSW 2000

Telephone: (02) 8298 0409

Facsimile: (02) 8298 0402









9 February 2007







Ms Liz Atkins

General Manager, Regulatory Policy

AUSTRAC

PO Box 5516

WEST CHATSWOOD NSW 1515





Dear Liz,







AML/CTF Act – clarification of “commence to provide” and a special

circumstances request



I refer to ongoing consultation between AUSTRAC and industry regarding the

Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the AML CTF

Act), and to our meeting on 1 February. This letter sets out industry‟s views on

this matter, and includes AFMA and IFSA input.



As you are aware, one of the major issues raised consistently by industry in

relation to the AML CTF Act is the definition of “commence to provide”.





1. Issue



1.1 Process



We believe that on the legislation as it stands:



 Industry will have to re-engineer all front end processes at

significant cost, with no apparent benefits in terms of risk

reduction. The major banks estimate that such a major systems

change would take at least two years. One bank has estimated that

its costs to change its systems would be approximately $5 million,

with an additional $12 million required to implement people and

process changes;



 Bona fide customers will not be able to deposit funds when needed.

For example:





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Australian Bankers‟ Association Inc. ARBN 117 262 978

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- migrants to Australia will not be able to set up facilities in

advance of their arrival and deposit funds; and



- customers in remote areas will be unable to set up facilities in

advance;



 Reporting entities that are unable to make the changes quickly will

be at a significant and unintended competitive disadvantage;



 Australian law in this regard would be more restrictive than, for

example, UK or US law. Financial institutions operating as part of

global businesses will face significant operational difficulties. ;



 AUSTRAC and law enforcement agencies will no longer receive

blocked account reports as a source of intelligence and will lose this

potentially efficient information mechanism for finding and

confiscating the proceeds of crime.



The principal reason why the legislation as it stands gives rise to the necessity for

such major system changes is the introduction of the prohibition upon opening an

account prior to identification, even if the account is entirely inactive, in addition

to the prohibition upon accepting deposits into a blocked account prior to

identification. This is a significant difference to current practice.



The definition of “opening an account” and the commentary in the Explanatory

Memorandum indicates the recently introduced definition of opening an account is

based upon a fundamental misunderstanding of bank processes. The incorrect

assumption is that there is a linear, step by step process, commencing with

“preparatory steps” such as customer application, populate customer profile,

obtain KYC information, complete identification checks as required and then

setting up the account facility with the account number.



This assumption is fundamentally incorrect. Currently the processes for setting

up the account happen in parallel while the other “preparatory” steps are taking

place. Linking the product (with account number) to a customer profile is actually

often one of the first things to occur – some institutions will also simply set up an

account for a customer on system near to the very start of any process. It is also

possible that a customer checking on the progress of their application can be

given their account number before the application is approved. Creating an

account does not happen after „preparatory steps‟, it is in fact one of the

preparatory steps.



The cost, and therefore the problem, is in a requirement to untie these systems.

All of these steps are currently programmed to happen automatically, and to alter

the sequences will require re-engineering extensive automated systems to work

„one step after another‟. Not only will the upfront re-engineering costs be very

large but the ongoing costs will be significantly increased because not doing

things in parallel takes time and is therefore much less efficient.



At the recent meeting between AUSTRAC, the ABA and industry these processes

were explained and the scale of the problem outlined.





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1.2 Products



Another key example is financial markets products.



As noted above, the Australian position is currently more restrictive than

international positions, including those in the US and UK. This will create

significant operational difficulties for financial institutions operating as part of

global businesses and could place Australian businesses at a competitive

disadvantage.



For example, UK law would allow a bank in London to accept funds from a

customer to invest in an Australian product, and to transfer those funds to an

Australian bank, with identification to be undertaken subsequently. However,

Australian law would not permit this. Similarly, an Australian bank with a US

trading desk currently completes US KYC checks as soon as practicable after

commencement of a designated service, as permitted by US law.



Given the low risk involved with financial markets products (recognised, for

example, by the JMLSG) and in order to permit the effective operation of financial

markets, it is appropriate to allow identification procedures to take place after the

provision of designated services in these circumstances, consistent with the

position in major international banking centres such as the US and UK.





2. ML/TF Risk



It is industry‟s view that the current risk mitigation practices have been

successful in preventing money laundering and that these should continue, with

enhancement as required. Industry considers that current procedures under the

Financial Transaction Reports Act 1988, pursuant to which, and subject to strict

protections, an account may be opened and funds accepted, are low risk and

consistent with procedures in other FATF compliant jurisdictions. In particular:



 all withdrawals are blocked until identification occurs;



 if identification does not occur within 12 months, a detailed report

is provided to AUSTRAC; and



 unless AUSTRAC is otherwise satisfied, funds in those blocked

accounts are forfeited to the Commonwealth.



Comparable jurisdictions such as the UK and US have similar processes in place,

which have been reviewed for ML/TF risk and confirmed in recent guidance such

as that issued by the UK JMLSG.



A more detailed description of current practice in Australia, as well as some

international positions, is set out in the attachment to this letter.



However, industry also understands that the Government wishes to be completely

satisfied with the risk outcomes relating to procedures under the AML CTF Act.

Industry would therefore like to work with AUSTRAC to achieve agreement on the









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risk profile of proposed procedures, and on the key elements of acceptable

procedures.





3. Resolution of Issue



Industry notes that the Government has already recognised the need for an

efficient practice, including by foreshadowing in the Explanatory Memorandum

(EM) to the AML CTF Act that rules are anticipated to enable certain steps to be

undertaken before identification processes are completed, such as the issue of

access cards.



The EM provides that:



“Steps taken preparatory to the provision of a designated service are not

considered to be part of commencing to provide the service.”



There is however a lack of clarity around what will constitute preparatory steps,

as opposed to provision of the service. This is a critical question which affects all

services and products provided by industry as well as the systems and processes

that underpin the provision of those services.



Industry has developed and drafted several options for discussion.



There may be other options available to resolve the issues we have identified,

and I would be grateful for your views on the suitability of options.



I look forward to the possible workshop we discussed. Please let me know if

there is any further information you might need now.









Yours sincerely









______________________________



Tony Burke









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Attachment







Current practice in Australia



Current practice involves allowing a customer to establish an account and make

deposits and to complete identification at a later time. Examples in which this

current practice now applies include:



 customers in remote areas;



 customers who contact banks via telephone or the internet;



 travellers to Australia with long-term visas, such as backpackers,

who may wish to open accounts in Australia before travelling;



 off-shore corporations that import/export with Australian

corporations and need to set up local accounts; and



 customers who wish to lock in terms but lack the required

identification.



However, strict protective procedures are in place to deter risky deposits, as set

out in AUSTRAC Information Circular No 8. All withdrawals are blocked until

identification has occurred. If identification does not occur within 12 months, a

report containing details regarding the customer, the facility, deposits to the

account and balances is provided to AUSTRAC. The funds are not released unless

AUSTRAC is satisfied. If identification is never completed and AUSTRAC is not

otherwise satisfied, the funds are sent to consolidated revenue. Therefore

depositors do not obtain access to the deposited funds. Further, AUSTRAC

receives information about blocked accounts, which could in itself be valuable

intelligence.



UK position



Industry understands that under the relevant UK provisions, reporting entities (or

their equivalents under UK legislation) are not precluded from opening an

account, providing a customer with an account number and taking deposits

before identification is verified. Unlike in Australia, deposits can be returned to

the customer if identification is not completed within a reasonably practicable

period, unless the relevant entity deems that the customer is suspicious.



The Joint Money Laundering Steering Group‟s “Prevention of money

laundering/combating the financing of terrorism Guidance for the UK Financial

Sector Part 1” (January 2006) recognises the operational issues associated with

verifying identity before commencing to provide a service, stating (at [5.4.6]-

[5.4.7]):



“Satisfactory identification of the customer must take place as soon as

reasonably practicable after the first contact between the firm and the

customer.





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Sometimes, in the normal conduct of business, it is possible that a

business relationship has to commence before verification of a customer’s

identity can be completed. This might be the case, for example, in

respect of some non face-to-face business, some investment

transactions, or some types of life assurance business. In such

circumstances, firms’ risk management procedures should take account

of these conditions, and should require controls to be placed over the

extent of the relationship entered into, or any funds held under the

relationship, until verification has been completed.”



US position



Industry understands that the relevant US provisions do not preclude the opening

of an account before verification of a customer‟s identity. For example, the US

Treasury‟s “Financial Recordkeeping and Reporting of Currency and Foreign

Transactions” (31 CFR 102) provides (at 121) that:



“[a customer identification program] must contain procedures for

verifying the identity of the customer…within a reasonable time after the

account is opened.”



Hong Kong position



The 'Supplement to the Guideline on Prevention of Money Laundering', Guideline

issued by the Hong Kong Monetary Authority under section 7(3) of the

Banking Ordinance provides:



3.6 An AI should not in general establish a business relationship with a new

customer until the due diligence process is satisfactorily completed.

However, it may be acceptable to allow an account to be opened pending

completion of the verification of identity provided that the necessary

evidence of identity is promptly obtained. In such a case an AI should not

allow funds to be paid out of the account to a third party before the

identity of the customer is satisfactorily verified [IN 8].



3.7 If an account has been opened but the process of verification of identity

cannot be successfully completed, the AI should close the account and

return any funds to the source from which they were received [IN 9].

Consideration should also be given to whether a report should be made to

the Joint Financial Intelligence Unit (JFIU). The return of funds should be

subject to any request from the JFIU to freeze the relevant funds.









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