Verification of Signatories to Wholesale Accounts

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Julia Lloyd
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11 March 2009 Ms Liz Atkins General Manager, Regulatory Affairs AUSTRAC PO Box 5516 WEST CHATSWOOD NSW 1515 Dear Ms Atkins Verification of Signatories to Wholesale Accounts In our letter of 9 January

1 11 March 2009 Ms Liz Atkins General Manager, Regulatory Affairs AUSTRAC PO Box 5516 WEST CHATSWOOD NSW 1515 Dear Ms Atkins Verification of Signatories to Wholesale Accounts In our letter of 9 January in response to AUSTRAC s draft Rule on identification of signatories to Vostro accounts, we indicated that we would be making a submission to AUSTRAC on identification of signatories to wholesale accounts in Australia. Verifying multiple capital market/wholesale account signatories presents similar practical problems and we believe these can be addressed with a similar solution. This submission is supported by the Australian Bankers Association. AFMA requests that AUSTRAC grant an exemption by Rule such that Division 4, Part 2 of the AML/CTF Act does not apply to a reporting entity in providing a designated service that: (1) Is either: (a) (b) of a kind described in item 2 of table 1 in subsection 6(2) of the AML/CTF Act; or of a kind described in item 3 of table 1 in subsection 6(2) of the AML/CTF Act; and (2) Relates to an account that is held by a wholesale client; and (3) Relates to signatories to the account who are employees or agents of the wholesale client; and (4) One of the following applies: (a) (b) the wholesale client is an entity in relation to which a simplified verification procedure is available pursuant to Chapter 4 of the AML/CTF Rules; or the reporting entity has: (A) collected the following information and documentation (if any) from the signatory: (i) the full name of each signatory; and (ii) evidence (if any) of the wholesale client s authorisation of any individual referred to in (i); and Australian Financial Markets Association ABN Level 3, Plaza Building, 95 Pitt Street GPO Box 3655 Sydney NSW 2001 Tel: Fax: info@afma.com.au Web:

2 (B) verified, if and to the extent warranted on the basis of the reporting entity s risk assessment, the identity of any signatory referred to in (A)(i). Account Signatories Items 2 and 3 of Table 1 in s6 of the AML/CTF Act identify the following designated services: in the capacity of account provider for a new or existing account, allowing a person to become a signatory to the account (where the customer is the signatory); and in the capacity of account provider for an account, allowing a transaction to be conducted in relation to the account (where the customer is both the holder of the account and each other signatory to the account). The statutory requirements applying in most circumstances are that a reporting entity must not commence to provide a designated service if the reporting entity has not previously carried out the applicable customer identification procedure (except in special circumstances), which includes verification of particular information in accordance with the reporting entity s AML/CTF program. The result is that a reporting entity is required to identify all signatories to an account and to collect and verify particular information in relation to each signatory. Wholesale Accounts The environment in which wholesale products and services are provided is significantly different to the retail banking sector. Wholesale capital market accounts facilitate large scale financial transactions for institutional clients, typically represented by the following entity types: Regulated financial institutions; Public listed companies and their subsidiaries; Regulated investment funds; Sovereign governments; Government agencies and statutory corporations; and Large private companies. AFMA members consider the ML/TF risks posed by such entity types to be low. One example of the type of entity in relation to which these provisions would apply is an Australian public listed company. For those entities, simplified due diligence is permitted, and customer due diligence (CDD) can typically be performed by reporting entities utilising information sources in the public domain. However, the provisions discussed above, as applied to the designated services in items 2 and 3 of the Table in s6, do not provide for simplified processes to be extended to account signatories despite the low levels of risk involved. Consequently, reporting entities have to approach the client and obtain lists of authorised signatories (identification) and documentation (verification) in respect of multiple individuals. Page 2 of 5

3 We consider this level of customer due diligence is inconsistent with the riskbased approach on which the Act is based, requires an unnecessary level of compliance with associated costs and will not yield meaningful results in the prevention of financial crime. The source of funds for the relationship remains that of the account holder (not the signatory); furthermore, reporting entities maintain controls to prevent authorised signatories from diverting account holder assets for their own personal benefit. It is important to note the practical considerations of this obligation, within the wholesale capital markets context: a) The wholesale/institutional nature of the client base; b) The low ML/TF risks posed by the client base; c) The volume of accounts is significantly different from the retail scenario: one institutional client may set up hundreds of accounts in the course of running its business; d) Multiple individuals are authorised by institutional clients to operate these accounts. Numbers of authorised signatories typically range from 10 to several hundred and some major clients literally provide a book of signatories. For example, for one AFMA member bank the average number of account signatories for wholesale market clients is 108. e) The ongoing administration, resources and maintenance of this level of due diligence places onerous and costly demands on reporting entities. f) There can be considerable turnover of account signatories in the normal course of business for institutional clients. This in turn requires significant ongoing due diligence to be performed by reporting entities in the absence of material ML/TF risk; g) As a matter of good human resources practice and in order to mitigate their own operational risks (eg fraud), the account holder organisations themselves will have verified the identity of their employees or agents in their own right and requiring reporting entities to verify identity is an unnecessary duplication of effort. Moreover, these customers are more likely to question the utility of providing this information (as they fail to see the risks it mitigates), resulting in unnecessary disputes and delays which can run to weeks to open accounts for clients that actually pose little ML/TF risk. Booking Entities and ADI Status Clients in the capital markets sector typically engage reporting entities for a variety of products or services. These products and services are commonly spread across a variety of legal entities (some of which may be ADIs) which are referred to as booking entities. However, it is arguable that accounts are provided by booking entities regardless of ADI status. Consequently, for certain products, account signatories will be asked to provide verification documentation simply because the booking entity for that specific product or service happens to be an ADI. AFMA members consider that if the aim of designated service in items 2 and 3 of Table 1 is to mitigate ML/TF risks, then these requirements would apply Page 3 of 5

4 across all financial services accounts. Instead, the resulting operation of the current requirements becomes a rather arbitrary tick-the-box process, rather than a process focussed on preventing money laundering or terrorist financing. International Practice FATF Recommendation 5: The Interpretative Note to FATF Recommendation 5 states then when conducting CDD on legal persons, reporting entities should verify that any person purporting to act on behalf of the customer is so authorised, and identify that person 1. Note: this is identification as opposed to identification and verification of the signatory. The FATF standard requires reporting entities to be satisfied that an account signatory is in fact authorised to act on behalf of the client and to obtain the names of the authorised persons, ie identification. FATF does not take the additional step of requiring verification of identity. For operational purposes, the list of authorised signatories (identification) is already captured by AFMA members. While we do not believe verification should be a mandatory requirement, taking a risk-sensitive approach, reporting entities may consider it prudent to verify the identity of such individuals in certain circumstances. International Current Practice: AFMA members note that other jurisdictions, which are considered comparable to Australia in the fight to prevent financial crime, do not mandate the verification of account signatories. Joint Money Laundering Steering Group, Industry Guidance, Part 1: Reporting entities within the UK are not required to identify account signatories in respect of entities to which simplified due diligence can be applied (eg public listed companies, or regulated entities). For all other legal persons, reporting entities verify that the signatories are duly authorised and obtain their full names. Verification of their identity is conducted on a risk-based approach (however, as noted earlier, this option is not allowed under the AML/CTF Act); Hong Kong Monetary Authority 2 : HKMA requires that for entities to whom simplified due diligence can be applied, it is only necessary to obtain the name of the account signatory. For all other legal entity types these persons must also be verified; United States of America: The AML/CTF regulations within the USA do not require identification or verification of account signatories within the wholesale capital markets sector. Extending the Principle Applied to Vostro Accounts As mentioned in our letter of 9 January 2009, AFMA members fully support the draft AML/CTF rule applicable to the verification of signatories to correspondent banking Vostro accounts. The explanatory note to the draft 1 Interpretative_Note_to_r_5 2 Page 4 of 5

5 Rule confirms that an exemption is appropriate for Vostro accounts because there are: potentially a large number of individuals (who) may give instructions for the operation of the account. Because of this, it is not feasible for financial institutions to carry out applicable customer identification procedures each time an employee of another financial institution, which is the account holder, is added as a signatory to the Vostro account. AUSTRAC s recognition of the practical problems involved in identifying multiple signatories can also be extended to institutional clients in the wholesale capital markets scenario where there is less ML/TF risk from a product perspective. AFMA recommends that AUSTRAC applies the same principle to the problem of the multiplicity of account signatories in the wholesale capital markets sector and suggests an exemption will resolve the issue. We suggest the following approach across the wholesale capital markets sector would be appropriate in meeting customer due diligence requirements in a practical and cost effective way: Entities to whom simplified due diligence is applicable (eg regulated financial entities/public listed companies and their majority owned subsidiaries) should be exempt from the requirements of the designated services in items 2 and 3 of Table 1. This will represent an extension of the approach taken in the current draft AML/CTF Rule on Vostro accounts, and will apply to low risk entity types only; A more flexible approach for designated services in items 2 and 3 of Table 1 for remaining entity types: the reporting entity should obtain the full name of the authorised person and any evidence of their authorisation to represent the account holder. Reporting entities may verify their identity on a risk-based approach (in other words, this would represent a due diligence standard similar to that which applies to agents); The risk-based approach taken by reporting entities will take into account a wide-range of factors, including the extent of CDD performed on the account holder, the domicile of the account holder, the nature of the account holder s business, its ownership and management, including any operational concerns which may arise after the account has been opened. We would be pleased to discuss the points raised in this submission with AUSTRAC at your convenience. Yours sincerely Duncan Fairweather Executive Director Page 5 of 5

Application for Exemption under the Anti Money Laundering/Counter Terrorism Financing Act 2006 (Cth) (AML/CTF Act)

31 January 2008 Ms. Liz Atkins General Manager Regulatory Policy Australian Transaction Reports and Analysis Centre PO Box 5516 West Chatswood NSW 1515 Dear Liz Application for Exemption under the Anti