Does AML Act Sect. 33 - Special Circumstances for KYC post commencement of a service - apply during the current COVID-19 emergency? If not, why not?
It is a fundamental principle of the AML regime that the Applicable Customer Identification Procedures (aka KYC, identification and verification) must be carried out before the commencement of the provision of a designated service for a new customer (AML Act, Sect. 32). That is unless the exemption in Sect. 33 applies.
Sect. 33 has provision for KYC to be carried out after the commencement of the provision of a designated service to a new customer. However, this only applies if, and only if [emphasis added] the following conditions apply:
- (a) the service is specified in the AML/CTF Rules; and
- (b) such other conditions (if any) as are set out in the Rules are satisfied.
So far so good. However, now for the bad news. Whilst there are specified services stated in the Rules, the list is very short. In fact there are only two, namely:
- Accounts for online gambling services (14 days - Rule 10.4); and
- A narrowly defined complex financial services scenario (5 days - Rule 46).
So for these services the ACIP / KYC on new customers can be carried out up to either 14 days (online gambling services) or 5 days (the financial services scenario) after the commencement of the provision of the designated service to the new customer. **In all other scenarios** the ACIP / KYC must be preformed before the commencement of the provision of the designated service to the new customer.
Under the current COVID-19 emergency it may not be possible for a reporting entity to either carry out, or to complete, the ACIP / KYC before the commencement of the provision of the designated service to the new customer. What options are available to a reporting entity in this situation? As the law currently stands there are only two: either do not provide the service; or break the law. No reporting entity should break the law.
What regulatory relief is available at present?
AUSTRAC issued a statement on 18th March which included the following:
“AUSTRAC will constructively work with you as you manage your money laundering and terrorism financing risks during this disruptive period. This includes considering your circumstances when applying the Anti-Money Laundering and Counter-Terrorism Financing laws.”
In our view, this statement does not provide the sort of regulatory relief required with regard to the Special Circumstances. In fact, only a new AML Rule can assist.
What might a COVID-19 Special Circumstances Rule include?
Taking Rule 46.2(8) as an example (the complex financial services example) the reporting entity is allowed to provide the designated services to the new customer before the ACIP / KYC if it:
- Cannot reasonably undertake the applicable customer identification procedure before the commencement of the provision of the designated service; (Rule 46.2(6) and
- Must put in place appropriate risk-based systems and controls to determine whether and in what circumstances to provide the designated service to a customer before the applicable customer identification procedure is carried out, including in relation to the number, types and/or amount of transactions (Rule 46.2(8).
The period of completion of the ACIP / KYC is:
- The day on which the reporting entity carries out the applicable customer identification procedure; or
- The end of the period of 5 business days after the day on which the reporting entity commenced to provide the designated service to the
Surely now is the time for AUSTRAC to provide a Rule under Sects 33 & 34 for the duration of this emergency. Is it not better for reporting entities to be working under the certainty of a formal Rule rather than relying on potential regulatory relief after the fact? Rule 46 is a good template with a 14 day period to complete the ACIP / KYC.
The New Zealand Approach
New Zealand has adopted the following approach, albeit under different laws. The existing delayed verification provisions in sections 16(3) and 24(3) of the AML/CFT Act enable a reporting entity to establish a business relationship with a customer, but delay the verification component of CDD until later, subject to the following conditions:
- it is essential not to interrupt normal business practice; and
- money laundering and financing of terrorism risks are effectively managed through procedures of transaction limitations and account monitoring or (if the reporting entity is not a financial institution) through other appropriate risk management procedures; and
- verification of identity is completed as soon as is practicable once the business relationship has been established.
This means a new business relationship with a customer could be established and funds credited into a facility, provided that verification is completed as soon as practicable after COVID-19 Alert Levels have been lifted.
Reporting entities need to consider how to effectively manage money laundering and financing of terrorism risks during this time. Supervisors expect reporting entities that are continuing to operate and establish new business relationships would implement transaction limitations, i.e. limited transfers or withdrawals until verification requirements were completed.”
This is not legal advice. If you need legal advice on your specific circumstances please see your lawyers for tailored legal advice.