Nostro Account Correspondent Banking …

1 Australian Financial Markets Association ABN 69 793 968 987 Level 3, Plaza Building, 95 Pitt Street GPO Box 3655 Sydney NSW 2001 Tel: +612 9776 7955 Fax: +61 2 9776 4488 Email: Web: 6 February 2009 Liz Atkins General Manager - Regulatory Policy AUSTRAC PO Box 5516 WEST CHATSWOOD NSW 1515 Dear Ms Atkins Nostro Account Correspondent Banking This submission arises from member concerns about the application of Correspondent Banking due diligence requirements to Nostro accounts. The submission is supported by the Australian Bankers Association.

2 1. Background and Summary In the context of recent AUSTRAC compliance audits of AFMA member banks, we understand that issues have arisen as to the application of the Correspondent Banking requirements in Part 8 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and associated Anti-Money Laundering and Counter-Terrorism Financing Rules (AML/CTF Rules). In particular, we understand that AUSTRAC staff carrying out the audits have expressed a view that the obligations apply both to Correspondent banks and respondent banks such that due diligence must be performed in relation to both Nostro and Vostro accounts.

3 We submit for the reasons contained in this letter that a Correspondent Banking due diligence requirement for domestic banks utilising Correspondent bank accounts provided by overseas financial institutions ( Nostro accounts) is inconsistent with the AML/CTF Act and AML/CTF Rules and with the relevant international standards. In summary, our view is that the definition of Correspondent Banking relationship in the AML/CTF Act does not extend to cover circumstances in which no Banking services are provided by the first financial institution.

4 This interpretation is consistent with international approaches to Correspondent Banking , and is appropriate in the context of a risk-based regime. 2. What is a Correspondent Banking Relationship? The term Correspondent Banking relationship has a particular legal meaning under section 5 of the AML/CTF Act. However, before analysing that definition, it is helpful to understand how such relationships work in practice. Page 2 of 7 The relationship between Correspondent and respondent banks can be depicted as follows: Bank A is in Australia Bank B is in a foreign country Bank B has an Account held at Bank A From Bank A s perspective: this is a Vostro Account Bank A is the Correspondent bank Bank B is the respondent bank Bank A has an Account held at Bank B From Bank A s perspective.

5 This is a Nostro Account Bank A is the respondent bank Bank B is the Correspondent bank Two relationships are depicted in the above example (from Bank A s perspective): (a) Bank A s relationship with Bank B as the provider of a Vostro Account in Bank B s name held at Bank A; and (b) Bank A s relationship with Bank B as the holder of a Nostro Account in Bank A s name held at Bank B. While the above example is reciprocal, in that each bank holds an Account with the other, this is not necessarily the case.

6 Each of these relationships can, and in practice does, exist independent of the other. Section 5 of the AML/CTF Act defines a Correspondent Banking relationship as follows: Correspondent Banking relationship means a relationship that involves the provision by a financial institution (the first financial institution ) of Banking services to another financial institution, where: (a) the first financial institution carries on an activity or a business at or through a permanent establishment of the financial institution of a particular country.

7 And (b) the other financial institution carries on an activity or business at or through a permanent establishment of the other financial institution in another country; and (c) the Correspondent Banking relationship relates, in whole or in part, to those permanent establishments; and (d) the relationship is not of a kind specified in the AML/CTF Rules; and (e) the Banking services are not of a kind specified in the AML/CTF Rules. Applying that definition to the example above, from Bank A s perspective only one Correspondent Banking relationship exists under s5 of the AML/CTF Act.

8 That is, when Bank A, as the first financial institution, provides Bank B with Banking services, that is, the provision of a Vostro Account . Accordingly, Bank A would be required to comply with the requirements in Part 8 of the AML/CTF Act in relation to that relationship. We understand that AUSTRAC audit staff may be of the view that a second Correspondent Banking relationship exists for the purposes of section 5 of the AML/CTF Act, in relation to Bank A s Nostro Account , held at Bank B.

9 Page 3 of 7 However, in this case, Bank A (the first financial institution ) is not providing any Banking services to Bank B, and it follows that from Bank A s perspective there is no Correspondent Banking relationship in relation to that Nostro Account . Rather, Bank A is receiving Banking services from Bank B. Should AUSTRAC s view be that there is ambiguity as to this interpretation, then regard should be had to those matters that can be used to aid statutory interpretation, being: (a) the objects of the AML/CTF Act; and (b) secondary legislative materials.

10 Each of these is discussed below. 3. Objects of the AML/CTF Act Section 3 of the AML/CTF Act provides, relevantly, that: (1) The objects of this Act include: (a) to fulfil Australia s international obligations, including: (i) Australia s international obligations to combat money laundering; and (ii) Australia s international obligations to combat financing of terrorism; and (b) to address matters of international concern, including: (i) the need to combat money laundering; and (ii) the need to combat financing of terrorism.