2023
The Australian Government Solicitor has given a final opinion on the application of the Financial Transaction Reports Act 1988 to cash management trust arrangements. This article discusses the treatment of “signatory” and “collects cheques”.
The financial services industry has long taken the view that Cash Management Trusts (“CMT”) were not subject to the identification and reporting requirements of the Financial Transaction Reports Act 1988 (“FTRA”). Last year, the Australian Transaction Reports and Analysis Centre (“AUSTRAC”) requested the Australian Government Solicitor (“AGS”) to give an opinion on the matter. AUSTRAC provided a list of questions which began with a “basic” CMT. The AGS provided a draft opinion April 2000 and requested submissions. A further draft opinion was given in October, 2001 and the final opinion was given on 22 November, 2001. It is posted on the AUSTRAC web site.
In a “basic” CMT, a financial institution FI offers a facility to its customer C whereby C provides funds to FI which in turn maintains an account with an authorised deposit taking institution ADI. It is assumed that FI is a “cash dealer” within the meaning of the FTRA, but is not an ADI. The “basic” CMT has the following features:
C may not deposit or withdraw currency
C purchases “units” in the CMT by means of a cheque drawn payable to FI which is sent directly to FI.
The AGS opinion finds that the “basic” CMT is not an “account” for the purposes of the FTRA. It is important to realise that the FTRA has a special definition of “account”. It is any facility or arrangement by which a “cash dealer” does any of the following:
accepts deposits of currency;
allows withdrawals of currency;
pays cheques or payment orders drawn on the cash dealer by, or collects cheques or payment orders on behalf of, a person other than the cash dealer;
and includes any facility or arrangement for a safety deposit box or for any other form of safe deposit, but does not include an arrangement for a loan that sets out the amounts and times of advances and repayments, being amounts and times from which the borrower and lender may not depart during the term of the loan.
The other important concept in the FTRA is that of a “signatory”: this is
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.
The effect of the AGS opinion is that the FTRA identification requirements do not apply to customers opening a “basic” CMT. Note that there is no provision in the “basic” CMT for a customer to withdraw or spend funds. In particular, there is no provision for the customer to operate in any way on the account maintained by the ADI.
Everyone agreed with the AGS opinion on “basic” CMTs. Non-basic CMTs differ from the “basic” model in
the way in which C provides funds to FI and
the way in which C may access deposited funds.
Taking (b) first, it is clear that if only electronic access is permitted, then the CMT is not an “account” for the purposes of the FTRA. Problems arise because the FI and the ADI have arranged for the customer to have direct access to the account held with the ADI. This may be way of some cheque facility arrangement or by electronic means. It is assumed throughout that the account held by the ADI is an “account” for the purposes of the FTRA.
Various arguments of various degrees of ingenuity were offered to explain why the customer is not a “signatory” of this account. To its credit, the AGS opinion rejects them all. In particular, it is not relevant that
each transaction ordered by C must be referred to FI
the Terms and Conditions state that C has no rights to give instructions to the ADI or
the ADI has standing orders to proceed in a certain fashion.
In each case, if C gives an instruction in fact, then C is a “signatory”. In my opinion, this is absolutely correct.
Turning to (a) above, submissions disagreed with the AGS opinion at the most basic level. Question 4 submitted by AUSTRAC was:
Are your answers different if the customer’s cheque, payable to ‘Investment Company X’, may be sent either to the investment company or the investment company’s bank?
The AGS’s answer is “yes” because this is a “facility” offered by a “cash dealer” (FI) whereby a “cash dealer” (ADI) collects cheques on behalf of a person (C) other than the cash dealer.
The disagreement on this issue was so strong that AGS offers an “Annexure A” explaining why they continue to hold this opinion. In the AGS view, the dispute is over the scope of “facility”. In my opinion, the dispute is over the scope of the phrase “collects cheques on behalf of a person”. This is discussed in full in section 2 below.
Although I and others expressed “strong” disagreement with the view taken by the AGS opinion, it may be that the differences are relatively minor. They do not, however, depend upon the scope of the term “facility”. Further, it will be suggested below that in the circumstances of question 4 that the customer C is a “signatory” to the ADI account. If that is correct, then the outcome of the dispute has almost no practical consequences since the customer would be subject to the identification requirements of the FTRA.2
According to the famous speech of Lord Atkin in Joachimson v Swiss Bank Corp,3 one of the obligations of the bank is “…to collect bills for its customer’s account. The proceeds so received are not to be held in trust for the customer, but the bank borrows the proceeds and undertakes to repay them.”4
Collection of bills, including cheques, involves a two stage process:
the bill must be presented for payment to the drawee
the funds received must then be credited to the account of the customer.
It is usually assumed that these two steps are performed on behalf of the same person, and this is the interpretation that some of us put on the phrase “collects cheques on behalf of a person”. If that is the correct interpretation, then the AGS opinion is wrong. A cheque may only be presented for payment on behalf of the holder. The holder of the cheque contemplated by Question 4 is FI and the cheque must be presented on its behalf.
AGS has justified its opinion by reference to the notion of a “facility”, but that does not change things if the interpretation of “collects cheques on behalf of a person” is as above. The best defence of the AGS opinion is that the two aspects of cheque collection need not be performed on behalf of the same person.
In other words, the best defence of the AGS position is that the cheque is presented for payment on behalf of the holder FI and the funds are collected on behalf of another person C.
It is clear from the AGS explanation in Annexure A that they are concerned with the collection of funds. This is clear from their explanation in Paragraph 12 and 13:
12. We note that it is said, in submissions on our draft advice that the bank collects cheques on behalf of the investment company rather than the customer and for this reason even if there were a facility or arrangement there would be no account. This is inconsistent with our understanding of how CMTs operate. This is essentially a factual issue. We understand that CMTs are commonly promoted as substitutes for saving accounts. Funds held in CMTs are held for the benefit of customers and customers generally receive statements listing their transactions and balances.
13. In these circumstances we consider it reasonable to assume that, if a facility or arrangement exists, funds are collected ’on behalf of a person other than the cash dealer. Such funds are collected on behalf of the customer…
This is not an unreasonable interpretation in view of the policy of the FTRA. If the funds are used and promoted as substitutes for savings accounts, and there is little doubt that they are, then they should be subject to the same identification requirements.
The situation is confused by Austrac Circular No 6 which indicates that the phrases “collects cheques” and “pays cheques” should be interpreted consistently with the Cheques Act 1986. Indeed, Paragraph 1 of Annexure A purports to agree with that, but then bases its departure from in by reference to “facilities”.
The Cheques Act 1986 does not support the AGS interpretation of “collects cheques on behalf of a person”. Section 95, the principle protection for collecting banks, clearly contemplates that the apparent holder of the cheque and the customer are one and the same: see the arguments in Tyree (Tyree 2001).5
Of course, there is no reason why the phrases need to mean the same in both statutes, but it would avoid confusion if they did. In an area which seems beset with confusion, we should be reluctant to contribute further.
Fortunately, it is possible to achieve the aims of the AGS report by a different route.
It is clear from the above extracts that the AGS was motivated in part by policy considerations. The same result may be achieved by noting that in the circumstances of Question 4 the customer may be considered as a signatory to the account held with the ADI.
By sending the cheque to the ADI, the customer is, in effect, saying “Collect this cheque on behalf of FI and credit its account with the proceeds.” This is what we usually call making a deposit to the account. In other words, the ADI is conducting transactions on the account on the orders of the customer C and so C is a “signatory” to the account for the purposes of the FTRA.
This conclusion seems inescapable, but is often overlooked because of a mistaken notion that anyone may deposit funds in the account of another. Textbook discussion of this problem usually arises in the context of a holder of a cheque wishing to “top up” the account of the drawer so that the cheque may be paid. Both Chorley (Chorley 1974)6 and Ellinger (Ellinger and Lomnicka 1994)7 suggest that there is no such right to deposit funds in the account of another. See also Rekstin v Severo Sibirsko Gosudarstvennoe Akcionernoe Obschestvo Komseverputj8.
The fundamental disagreement between the AGS and others concerning “collects cheques on behalf of a person” is not as important as some thought. There is some merit in maintaining conformity between the FTRA and the Cheques Act 1986, but it is not crucial.
Under the AGS view, the CMT is an “account” for the purposes of the FTRA and so would be responsible for identifying the customer. In most real-life CMT operations, the customer will also be a signatory of the ADI account, so the ADI will also have to identify C.
Under the alternative suggested above, the CMT is not an “account”, but the option of sending the cheque directly to the ADI makes C a “signatory” to the ADI account.
Although both are interesting approaches, there is only one practical effect: financial institutions will require customers to send cheques directly to them rather than offering the option of delivery to the ADI. Everyone then agrees that the CMT itself is not an “account” (unless, of course, it offers some additional features). Since the customer must have some means of accessing funds, he or she will almost certainly be a “signatory” to one of the accounts under the approach taken by the AGS.