Proposed amendments to the regulation of certain banking and financial operations and controls over them

The Draft Law introduces a new ground for the termination of a bank account agreement by the bank. According to the Draft Law, banks will have the right to withdraw from their obligations under a bank account agreement in cases specified by the Federal Law “On Countering the Legalization (Laundering) of Proceeds from Crime and Terrorism Financing” by giving a written notice to the customer.  The bank account agreement will be terminated from the day the bank receives a written consent for the termination from the customer.  In the event that the customer fails to submit such a written consent to the bank within one month period, the bank account agreement will be deemed terminated. 

At present Article 859 of the Russian Civil Code allows the termination of a bank account agreement:  (a) at the discretion of the customer at any time; and (b) at the discretion of the bank in limited circumstances (e.g., no account activity for a certain time period and/or insufficiency (lack) of funds in the account).

The Draft Law also provides several new grounds for the refusal by the bank to enter into a bank account (deposit) agreement and to perform its obligation under such an agreement.  (See Section 5 below for more details).

The Draft Law will require banks to disclose information regarding bank accounts and transactions of legal entities, sole entrepreneurs, as well as bank accounts (deposits) of individuals (natural persons) to criminal investigation authorities pursuant to a court order.  Further, bank employees will be prohibited from divulging any information concerning the facts of disclosures with respect to customers’ bank accounts (deposits) and/or transactions made at requests of criminal investigation authorities.

At present banks are obliged to notify the tax authorities at the place of their location of the opening or closing of an account, any change of account details of an organization or a sole entrepreneur, of granting or termination of the right to use electronic means of payment.  In the event that the Draft Law is passed that same obligation will extend to bank accounts (deposits) of individuals (natural persons).  The Draft Law introduces a provision according to which information regarding bank accounts (deposits), fund balances, account statements and information on the use of electronic funds (transfers) may be requested by the tax authorities when conducting tax audits and/or collecting taxes due from individuals (natural persons).

It is further proposed that that tax authorities may request information regarding bank accounts (deposits), fund balances, account statements and information on the use of electronic funds (transfers) of legal entities, sole entrepreneurs and individuals (natural persons) upon request of an authorized body of a foreign state in the cases provided for in international treaties of the Russian Federation.

The Draft Law introduces a new ground for the tax authorities to suspend bank account operations and electronic funds transfers of taxpayers – legal entities.  The tax authorities will be authorized to take such decisions when the post returns a mailing of the tax authorities with a mark of failed delivery due to the addressee’s refusal to receive the mailing or due to the absence of the addressee at the specified address.  The introduction of the above rule will correspond to the new obligation for legal entities to receive mail from the tax authorities at the address of the legal entity indicated in the Unified State Register of Legal Entities.

The Draft Law will amend the list of designated organizations engaged in transactions with monetary funds or other property in accordance with the Law “On Countering the Legalization (Laundering) of Proceeds from Crime and Terrorism Financing”.  As it was before, designated organizations engaged in transactions with monetary funds or other property will have to comply with special requirements imposed on them by the Law “On Countering the Legalization (Laundering) of Proceeds from Crime and Terrorism Financing”.

The list of transactions with monetary funds or other property that are subject to mandatory control is substantially expanded by the Draft Law.  If at the present the list contains 20 types of transactions, the Draft Law will increase this number up to 46.  In particular, transfers of funds to/from microfinance organizations and/or consumer credit cooperatives, transactions with precious metals, gems, etc., payments related to gambling and betting, etc., will be subject to mandatory control with the enactment of the Draft Law.

The Draft Law details to a large degree mandatory control over transactions of professional securities market participants.  In addition, mandatory control will extend to transactions related to assignments of receivables by a client (creditor) to a third party (debtor) arising out of purchase-and-sale of goods, provision of work (services) by the client to a third party, including factoring transactions. 

The Draft Law contemplates substantial changes in the rights and duties of organizations engaged in transactions with monetary funds and other property.  The Draft Law introduces the concept of a “beneficial owner’’.  According to the Draft Law, a beneficial owner is an individual (natural person), who directly or indirectly (through third parties), independently or jointly with other related (affiliated) parties has the capability to determine the actions (decisions) of the customer.

The Russian Government will set out the criteria for the beneficial owner status determination.   The requirements as to the identification procedures of such persons will also be set out by the Government. For credit institutions such criteria will be set by the Russian Central Bank upon agreement with the regulatory authorities for the securities market.

While now the organizations performing transactions with monetary funds and other property are required to “systematically update” information on their customers and beneficiaries, the law does not provide for any specific timeline for this.  With the enactment of the Draft Law these organizations will be required to update such information at least on an annual basis, and in case of doubts as to the reliability and accuracy of previously received information – within seven business days after such doubts had arisen.

The requirements for making documentary records of information are also being supplemented by the Draft Law. Organizations performing transactions with monetary funds and other property will be required to document information in the following cases:

• performance of a transaction by a customer in respect of whom the authorized government agency for financial transaction monitoring has sent or had previously sent to the organization a written request concerning the customer’s transaction(s) or account activity; 

• an attempt by the customer to perform a transaction which gives rise to a suspicion that it may be aimed at legalizing (laundering) proceeds from crime or terrorism financing.

The Draft Law would significantly alter the grounds for refusal by a bank to enter into a bank account (deposit) agreement. The following options would be available under the Draft Law: (a) a refusal to enter into an agreement, including a new agreement/prolongation of an agreement; and (b) a refusal to perform obligations under an existing bank account (deposit) agreement.  In some cases banks will be entitled, and in other cases obligated, to refuse to enter into a bank account (deposit) agreement or perform their duties under such an agreement, with a subsequent notice of such facts to be given to the authorized government agency for the financial transactions monitoring. 

In particular, banks will have the right to:

• refuse to enter into a bank account agreement if there is information on a possible involvement of the person in terrorist activities or due to the absence of the management bodies (or other lawful representatives) of a legal entity at its stated place of location;  and

• refuse to enter into a new agreement when the customer regularly performs transactions giving rise to suspicions as to possible legalization (laundering) of criminal proceeds or terrorism financing, or when the customer repeatedly fails to provide information, or provides false or inaccurate information or documents that are required according to the Law “On Countering Legalization (Laundering) of Proceeds from Crime or Terrorism Financing”. 

At the same time banks will have the obligation to refuse to perform under a bank account (deposit) agreement with a customer in the following cases:

• there is information that at the time of the bank account (deposit) opening the customer (or a representative) provided false information and documents required for the identification of the customer, the representative, the beneficial owner and/or the beneficiary, as well as false or invalid documents required for the bank account (deposit) opening under Russian law;

• repeated failures during the year by the customer (or a representative) to provide information or documents requested by the bank to clarify the customer’s transactions, or the provision of false information or invalid documents; 

• absence of a legal entity, its permanent management body or other lawful representatives at its stated place of location.

According to the Draft Law a bank will also be entitled to refuse to perform its obligations under a bank account (deposit) agreement, when the customer repeatedly conducts transactions that raise reasonable suspicions at the bank as to possible legalization (laundering) of criminal proceeds or terrorism financing.  The criteria of reasonable suspicions for such transactions are to be established by the Russian Central Bank upon agreement with the authorized government agency for the financial transactions monitoring.

Grounds for refusal by professional securities market participants to enter into contracts for the provision of services in the securities markets for legal entities and individuals are broadly similar to the grounds for refusal of banking services established for credit institutions and are also regulated by the Draft Law.

A new ground for the suspension of bank account operations for up to two business days (pending a decision of the authorized government agency) is being introduced.  This may be applicable, e.g. for transactions where the bank has reasonable suspicions as to possible legalization (laundering) of criminal proceeds or terrorism financing.  Notably, it is established that the authorized government agency will not be liable for losses that may be incurred by an organization (the customer) as a result of such a suspension of bank account operations.  Therefore, losses incurred by the customer as a result of such a suspension may be recoverable from the credit institution, unless it can prove that its suspicions were reasonable.

Article 174 of the Russian Criminal Code “Legalization (laundering) of proceeds acquired by third parties as a result of a crime” at present establishes a threshold of 6,000,000 roubles for a financial transaction to qualify as a “large scale transaction” and thus triggering criminal liability. With the adoption of the Draft Law this threshold for a “large scale transaction” will be lowered to 600,000 roubles, with the 6,000,000 rouble level qualifying for an “extremely large scale transaction”. The same thresholds will apply for the purposes of article 174.1 “Legalization (laundering) of proceeds acquired by a person from a crime”.

The adoption of the Draft Law and its entry into force are expected in 2013.   We shall be following closely the legislative process of this Draft Law and we shall keep you updated on new developments.

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