20210806 Money in a bank: whose is it?

The essence of banking is that a bank is in a fiduciary position in relation to its customers and that deposits are, in effect if not in law, held on behalf of account holders in a form of trust.

In short, money in the bank belongs to the account holder.

What if it doesn’t?

It makes absolute sense that money in a bank account belongs to the account holder. If the bank defaults, the state guarantees that it will, up to a certain limit, compensate the account holder for the loss. If it’s not the account holder’s money, there is no loss and therefore no compensation.

Depositors hand their money to the bank for safe keeping. How many think that in doing so they transfer ownership of it to the bank?

In relation to money laundering, the principle money launderer is the account holder, not the bank itself.

The world would become a chaotic place if neither the bank nor the state recognised that money deposited into a bank account belongs to the account holder.

Get ready for chaos.

On the 5th August 2021 the UK’s Office of Financial Sanctions Implementation made an Order that is at best unsettling and at worst catastrophic.

The OFSI is not the brightest of units: for example, it adopts the sensible approach of putting the date in the headlines of its notices. But it screws that up because it puts it in dd/mm/yy format which means that instead of being able to sort them by year, month, day (as my blog titles permit), sorting numerically  lists all of those issued on the fifth of any month of any year.  Also, its website links to documents with the words “Report link” which, pretty much anyone who has ever used the internet, knows is the term used to tell a webmaster that a link is broken.  Once one passes that hurdle, there’s a PDF file.

It is deep in that document that the time bomb sits.

The facts are that a money transmitter, a FinTech, did as many FinTechs will do and did not have adequate compliance systems in place and, worse, did not have, on the staff or on retainer from outside, adequate knowledge and understanding of sanctions law and practice. That, one has to presume, means that it did not provide adequate training.

When a customer of the money transmitter transferred money to a customer of a Russian bank that is subject to sanctions, the FinTech did its due diligence checks on its own customer and on the recipient, identified no reason to not do the transaction and sent the money.

The FinTech’s conclusion that the Russian bank was a mere conduit and that the ultimate beneficiary, as noted in the instruction, was the point of concern  was, of course wrong. So there is no question: it breached sanctions and should be punished.

The OFSI says the company “demonstrated a poor understanding of financial sanctions throughout its engagement with OFSI.

There are no arguments here on that point and no doubt the Financial Conduct Authority, which regulated the company as an authorised payments institution will blame the company rather than its own failure to properly implement policies and procedures relating to FinTechs and to supervise them as they should be supervised.

No doubt HM Revenue and Customs which also regulated it will say that the company’s policies and procedures were defective. They may have been but this failure did not arise from that: it arose from a lack of knowledge and understanding by a designated officer.

But that is not what is going to cause mayhem.

The potential for mayhem  arises because the OFSI gave, as its reasons, the following:

The company “asserted that as the relevant clients and beneficiaries were not themselves subject to financial sanctions restrictions, the payments to their accounts with [the Russian bank] were not breaches; OFSI considers that this is not the case as funds held in bank accounts ultimately belong to those banks. In respect of this and other factors, [the company] demonstrated a poor understanding of financial sanctions throughout its engagement with OFSI”

Extract this part: “OFSI considers … as funds held in bank accounts ultimately belong to those banks. “

Let that sink in.

Let’s take the word “ultimately.” It’s a word that is bandied around a lot recently as in “ultimate beneficial owner.”

So let’s combine those two things and follow the logic.

Mr A opens a bank account in the name of B Limited. B Limited is controlled by Mr C.

So the ultimate beneficial owner of the company, under generally accepted principles, is Mr C.

Taking the OFSI’s position, the money in the bank does not belong to B Limited nor to Mr C. It belongs to the bank.

Why then does anyone dealing with B Limited need to perform KYC on A, B or C?

The OFSI’s position is stupid. But it’s not a ground for appeal by the money transmitter.

But it does require someone to tell the OFSI to sort itself out and revise its Order before chaos ensues.

After all, if the word of a government department that it is proposing to freeze moneys in the hands of a bank, as the USA habitually does, can cause a run on a bank, how much more systemic would it be if all the world’s customers were to learn that they don’t own the money in their own bank accounts?

No, OFSI, money in banks emphatically does not “belong to the banks.” But the fact that the OFSI thinks it does and was prepared to opine such in a very high-profile manner demonstrates not only a level of ineptitude that is terrifying in the hands of a government department but, worse, a complete failure to comprehend the potential for disaster that its mistake may make.

On a scale of one to reckless, reckless doesn’t come close.

Of course, the OFSI is right that the company was wrong. But the OFSI is wrong, in the most spectacular way, by setting out the reasons that the company was wrong.

The company was wrong because it failed to recognise that it is involved in a quasi-correspondent banking relationship. It is the dealing with the bank, not with the status of the bank, and that creates the offence under sanctions laws (although this case was dealt with by civil penalty not criminal prosecution).

The OFSI tried to respond to a nonsensical position – that it is the recipient of the funds not the bank that sanctions relates to.

The OFSI did not need to answer that point and if it did its only reply should have been to deny it outright as flawed because the law says what must be done and what must be done is to not deal with a listed person. That’s what the company did, res ipsa loquiter, quod erat demonstrandum, et al. Give us the money for the penalty.

There is a great benefit in saying what’s needed and shutting up. The OFSI kept talking.

Now they have to fix it, or hope no one notices.