September 2006 Top Story:
**MLI ARCHIVE***
Instant freezing is a tip-Off like no other
Entities’ obligation to freeze accounts on instant suspicion is legally wrong and unworkable, says Joy Geary.
A surprise inclusion in Australia’s proposed AML/CTF laws is a prohibition on reporting entities commencing to provide or continuing to provide a designated service (as defined in section 6 of the bill) unless certain actions have been taken, usually associated with events such as:
- events which give rise to a suspicious matter reporting obligation (Section 27A and 27B);
- doubts which have arisen regarding identity (Section 32 and Rule 4.2.1).
The prohibition begins on the instant of forming suspicion and lasts until the reporting entity has carried out the applicable customer identification procedure or taken such action as specified in the rules.
The objections to these freezing obligations are (a) the tipping off consequences and (b) the practical impossibility of complying with them.
It should already be obvious that a reporting entity cannot possibly comply with this prohibition where the event involves an existing customer because the obligation is triggered by the forming of a suspicion.
It is irrelevant for the purposes of this article whether the customer was a customer before the commencement of the AML/CTF bill or became a customer after the commencement date of the new law.
Leave to one side for a moment whether it is practically possible for a reporting entity to comply with these obligations to freeze provision of designated services and just look at the tipping off consequences.
To freeze provision of designated services to existing customers will cause them to be aware that either there has been a suspicious matter reporting obligation or doubts have arisen regarding their identity. A long-standing tenet of AML and CTF laws has been a prohibition against tipping off a customer that a suspicion has arisen regarding them or their transactions.
There is no plausible explanation that could be given by a reporting entity to a customer as to why their cheque account, savings account, credit cards, lines of credit, funds transfers, deposit of salary payments, completion of electronic debits, internet banking services, telephone banking (to name just a few) are suddenly unavailable.
If we look at the number of suspicious activity reports received by Austrac in 2004-2005, they translate to the freezing of accounts for 74 customers each banking day in Australia. If we assume most customers have a minimum of three accounts, then over 200 accounts per banking day will need to be frozen for a short period of time (measured in days and weeks, not hours).
The rate of lodgement of suspicious activity reports rose 49 per cent in 2004-2005 over the previous year, and if this trend continues these figures will be much greater in 2006-2007 and subsequent years.
Not one of these customers will believe the banking version of a “dog ate my homework” in response to their angry queries as to why their banking services have abruptly ceased.
Responses such as “we are having a problem with the computer today” or “your banker is away sick and we cannot access your accounts” simply will not work.
Reporting entities have no legal mechanisms to be able to soothe unhappy customers who have had their accounts frozen. As far as handy hints for telling customers why their accounts are frozen, none come to mind.
Beyond tipping off, what are the practical problems for a reporting entity to freeze an account? The prohibition is immediate in its operation, so the freezing obligation has not even been sensibly linked to the filing of the suspicious activity report. A reporting entity can lift the freeze once it has completed either or both of the applicable customer identification procedure or taken such action as specified in the rules.
The rules specify that a reporting entity must apply its enhanced customer due diligence program where a suspicious matter reporting obligation has arisen. Both the applicable customer identification procedure and the application of the enhanced customer due diligence program will take time.
At the bare minimum, a reporting entity would consider if it should apply enhanced due diligence even if it decides not to.
None of these steps can be done instantly, or even on the same banking day.
There is no leeway to communicate with computer systems, branches, relationship managers, credit card issuers and credit card merchants regarding the intention to implement a freeze regarding a particular customer.
Time is not the only problem. If the freezing obligation is enacted, then it could come into operation at times like the following:
- settlement on acquisition or disposition of real estate which would have to be delayed by the reporting entity without valid explanation;
- effecting direct debits which might include loan payments, placing customers in default of their lending agreements or other commitments to pay debts;
- refusal by a reporting entity without valid explanation to honour cheques drawn on accounts but not yet processed;
- refusal of credit card transactions or ATM transactions, which might be in circumstances of real emergency leaving customers stranded without funds or the ability to acquire essential services.
There is no blanket obligation to freeze provision of all designated services in Britain or the United States. Switzerland uses a freeze which operates for five days following the filing of the suspicious activity report.
But it is not when the suspicion is formed. The reports filed in Switzerland involve extensive investigation before filing, unlike our current requirement to file within 24 hours for most suspicious events.
In short, the obligation to freeze is a nonsense, because it will tip off people that a suspicion may have been formed regarding them or there is real doubt about their identity.
Freezing cannot be done in an instant, and even if can be done at a technical level which is highly unlikely, it leads to many unintended consequences. And there is no requirement under the FATF 40 Revised Recommendations and the nine Special Recommendations for freezes to be implemented as part of a country’s laws.
And what happened to the principle of innocent until proven in a court of law to be guilty?
By the way, if a reporting entity does not comply with the obligation to freeze, it carries a penalty of a jail term of two years or 120 penalty units.
Joy Geary is an independent consultant on anti-money laundering. Contact: jmgeary.abbey@bigpond.com
DelMonte Publications Aug 2006
