Alan L Tyree

CMTs, FTRA, etc, etc

Alan L Tyree*

1  Background

A cash management trust (“CMT”) is an arrangement between a financial institution (“FI”) and an authorised deposit taking institution (“ADI”). The purpose of the arrangement is to permit customers of the FI to maintain accounts which offer certain transactional facilities that cannot be provided directly by the FI.

Generally, neither the ADI nor the FI obtain identification references sufficient to satisfy the requirements of the Financial Transaction Reports Act 1988 (“FTRA”). This has been a cause of concern to the Australian Transaction Reports and Analysis Centre (“AUSTRAC”). In December, 2000, AUSTRAC received an opinion from the office of the Australian Government Solicitor (“AGS”) on the matter. AUSTRAC has posted the opinion on their web site and has asked for comment on it.

1.1  CMTs

There is no single uniform model for the structure of a CMT, but there do seem to be some common basic features. The FI opens an account with the ADI. Some facility is provided whereby the customer (“C”) of the FI may deposit funds and make withdrawals from this account.

The normal method of providing for deposits is to require C to provide a cheque drawn in favour of FI. This may either be a bank cheque or one drawn by C on another account. Most CMTs also allow deposit by electronic transfers from other accounts. CMTs do not allow deposit of cash amounts.

There is less uniformity in methods of withdrawal. Most common are the provision of a credit card, a debit/EFTPOS card or a cheque facility. Where a cheque facility is provided, the customer C is issued with a chequebook that typically has the name of both the FI and the ADI printed on it. Since the parties intend it to be a cheque, it must be addressed to the ADI. The cheque is normally drawn by C, but in some cases it is drawn by the FI through C acting as agent.

CMTs typically do not permit withdrawal of currency.

1.2  FTRA requirements

The FTRA requires “cash dealers” to follow appropriate identification procedures when opening an “account”. It also requires that each “signatory” to the account be properly identified. In the CMT arrangement, the ADI is unquestionably a “cash dealer” and, since the FI is acting as a trustee it will also be a “cash dealer”.1

For our purposes, an “account” is any facility or arrangement whereby the cash dealer accepts deposits of currency, permits withdrawals of currency, pays cheques drawn on itself, or collects cheques on behalf of a person other than the cash dealer.2

Section 18 requires the cash dealer to obtain “account information” and “signatory” information. The section is long and involved, but does not provide any significant exceptions to the general rule. The information required is, in essence, information which provides reasonably certain identification of the account holder and/or signatory.3

A “signatory” means means the person, or one of the persons, on whose instructions (whether required to be in writing or not and whether required to be signed or not) the cash dealer conducts transactions in relation to the account.4

Everyone agrees that there is no “account” if withdrawals and deposits may only be made by electronic transfers.

2  Is there an “account”?

There seems general agreement that the ADI has opened an “account” for the FI since it is clear that the ADI collects cheques on behalf of the FI. This is so even if the only cheques collected are the customer cheques drawn in favour of the FI. These cheques are collected on behalf of the holder, the FI.

Where the CMT provides a cheque facility, the ADI also pays cheques drawn on it. As will be seen below, there is some disagreement about who the “signatory” of the cheque might be.

2.1  Does FI collect cheques?

Rather bewilderingly, the AGS opinion also suggests that FI might be collecting cheques on behalf of another person. To quote from the opinion:

Where a CMT is established by way of cheque payable to Investment Company X [insert customer name], the investment company may also be collecting cheques for the purposes of the definition of account by acting through the bank. The acceptance of cheques is a service that is offered as part of the bundle of services comprising the investment companys CMT. In our view, the collection of cheques through the bank therefore constitutes a facility or arrangement by which the cash dealer (namely, the investment company) collects cheques.

In my view, this is clearly incorrect. The general meaning of the term "collection" refers to a customer of an ADI requesting the ADI to present, on his or her behalf, the cheque for payment to the drawee institution. When paid, the funds are made available to the customer by crediting to his or her account. The "collecting ADI" acts as agent for the customer when presenting the cheque for payment.5

Only the "holder" of a cheque is entitled to payment of it.6 If the ADI is acting as agent to present the cheque for payment, then it must follow that the customer must be the holder of the cheque, or be entitled to present the cheque for payment in some other way. Since the customer is not entitled to present a cheque made payable to FI, that would seem to dispose of the argument that FI is collecting "on behalf of the customer".

A careful consideration of the Cheques Act 1986 leads to support for this conclusion. Section 95 refers to the process of collection as one where the bank "receives payment of a cheque". However, the context of the phrase may be seen by considering ss(1)(3) which makes it clear that the section is only concerned with cheques where the "customer has no title, or has a defective title". It is clearly contemplated that the customer referred to in s95 is at least the apparent holder of the cheque.

Section 96 provides protection for the collecting institution in certain cases where the cheque is not indorsed, again implying that the cheque is drawn in such a way that the customer is the apparent holder. Section 97 considers the situation where "the holder of a cheque lodges the cheque" with an institution. Section 62 refers to the "collecting institution", but provides no further clue about when the institution is presenting "on behalf of a customer".

AUSTRAC Information Circular No 6 indicates that the AUSTRAC view is that "collects" has the technical banking meaning as reflected in the Cheques Act 1986.

For these reasons, it seems clear that the FI is not "collecting" a cheque payable to itself within the normal understanding of the word. It is presenting the cheque for payment on its own behalf or requesting the ADI to present the cheque and to credit the proceeds to the account of the FI.

It is said that the "commercial reality" is that the FI is collecting the cheque "on behalf of the customer" since the proceeds of the cheque are reflected in the balance of the CMT. Accepting the view would entail the conclusion that every cheque is collected "on behalf of the drawer" since the "proceeds" of the cheque are always reflected in the consideration given for the cheque. The absurd conclusion is that the FI must obtain an identification from anyone who draws a cheque in favour of the FI.

2.2  Does FI pay cheques?

The AGS opinion also suggests that the FI may be operating an “account” if there is a cheque facility associated with the CMT. In this case,

the investment company may also pay cheques, through an arrangement with its bank, within the meaning of paragraph (c) of the definition of account.7

Again, this seems incorrect on fundamental principles. As we noted above, the FI will not normally be an institution on which a “cheque” may be drawn. Even if it can be argued that it “pays cheques” it is hard to argue that it pays cheques “drawn on itself” since an instrument drawn on the FI will not be a “cheque” within the meaning of the Cheques Act 1986.

We may conclude that the FI is not conducting an “account” merely by accepting cheques drawn in its favour and providing a cheque facility.

2.3  Credit/debit cards

Where the account can be operated by a credit or debit card issued to C, it would seem that there is an “account” since in most cases cash withdrawals would be available. In this case, the FI is probably operating an “account” since it is a facility or arrangement that permits cash withdrawals. This is also the conclusion reached by the AGS opinion.8

There is one exceptional case. Some facilities provide a credit card facility that does not permit cash advances and, of course, does not permit cash deposits. Such a facility seems outside the definition of “account”. This case does not appear to be considered by the AGS opinion.

3  Is the customer a “signatory”?

Assuming that there is an “account”, then it seems almost obvious that the customer is a “signatory” since he or she provides instructions which result in transactions being conducted. Indeed, the AGS opinion dismisses the issue in three short paragraphs coming to the conclusion that the customer is a signatory to the account held with the ADI and, where the FI carries out instructions issued by the customer, a signatory to the “account” (if there is one) with the FI.

Of course, with anything so obvious there is bound to be an argument against it. Here is the one used by CMT operators with respect to a CMT that offers a cheque facility:

It appears that this argument is meant to be taken seriously.

The FTRA offers no guidance on the meaning of “instructions …the cash dealer conducts transactions in relation to the account”. Most people seem to agree that it is a question of fact. One would have thought that when C writes “Pay X the sum of $Y” that this would be, in fact, an instruction. Similarly, when the ADI in fact makes the payment, one would have thought that it was acting on that instruction.

What of the reference to the FI? Is this any different from referring an ordinary cheque to the branch manager for approval? This is a common practice when an account is in difficulty. Can it possibly be said that the ADI is then acting on the instructions of the manager rather than on the written instructions of the drawer?

Further, since we are concerned here with facts, consider what latitude the FI really has in this process. It can tell the ADI not to pay, but it cannot say “Well, C has written this cheque to Smith, but I think that it really should be paid to Jones.” Or “C has written the cheque payable to Smith for $100. I know Smith. He’s a good guy. Let’s make it $200.”

In other words, as a matter of fact, the FI is not at liberty to give any instructions other than “Don’t pay!”.

Further, note that the definition of “signatory” indicates that it is the person or one of the persons who gives instructions. It seems almost impossible to argue that C is not one of the persons giving instructions which lead to a transaction on the account.

It has also been argued that C cannot give instructions to the ADI since there is no contractual relationship between them. Unfortunately for this argument, the Cheques Act 1986 clearly contemplates that C may give instructions, called an “order” in the Act, to an institutions whether there is a contractual relationship or not. In addition, the institution may come under an obligation to the holder if it does not deal with the cheque promptly!10

One further point on this general argument: the FI/C contract often contains a clause to the effect that C is not entitled to give any instructions to the ADI, in particular, is not entitled to give a stop payment order. Such a clause is almost certainly ineffective at best, misleading and deceptive at worst. Section 90 of the Cheques Act 1986 provides that both the duty and the authority to pay the cheque are terminated by countermand. Section 6 provides that section 90 is one that cannot be avoided by agreement.

4  Summary

The AGS opinion is a valuable one, but it is probably incorrect in its conclusions about the FI collecting cheques made payable to it and paying cheques drawn on it. It should deal more completely with the argument that the customer is not a “signatory”.

The draft opinion emphasises that each scheme must be considered individually and that there must be a “close analysis” of the features of the individual facility. It concludes, however, that most CMTs involve the use of an “account” and that “[a] wide variety of transactions conducted by a customer on that account potentially attract the definition of ’signatory’…”.

As a matter of policy, it is obvious that CMTs should be caught by the FTRA regime. Illicit cash can be converted to bank cheques, deposited in the CMT and then extracted via the cheque facility. This is precisely the reason that the FTRA requires identification of account holders of ordinary cheque accounts.

To summarise the views expressed in this note:

Both AUSTRAC and the AGS opinion note that the reasoning in the opinion may be applicable to other products. If these products offer an opportunity for money laundering, then they should be caught by the FTRA.

Although it is beyond the scope of this note, we should also note that some identification procedure must be developed to permit electronic commerce to flourish. At the present time, there seems no adequate mechanism to permit on-line identification.

References


*
Consultant, Mallesons Stephen Jaques, Sydney; formerly Landerer Professor of Information Technology and Law, University of Sydney. The views expressed are my own.
1
Section 3(1), definition of “cash dealer”.
2
Section 3(1). There are various other inclusions and exclusions which are not relevant to the present discussion.
3
The information required is set out in s3 of the Act. Procedures for satisfying the requirement are set out in the Regulations and in AUSTRAC information circulars.
4
Section 3.
5
see Paget’s Law of Banking, 11th ed, pp 407ff; Ellinger & Lomnicka, Modern Banking Law, 2nd ed, pp 502ff, Tyree, Banking Law in Australia, 3rd ed, pp 180ff; s66 Cheques Act 1986.
6
The cheque is only “duly presented” if demand for payment is made by or on behalf of the holder: see section 61, Cheques Act 1986.
7
At paragraph 21.
8
At paragraph 22.
9
This is the usual case. Of course, where C draws the cheque as agent of the FI, these clauses are not included.
10
See section 67. Note that it is not possible to “contract out” of this provision: s6(2).