Online deposit banks face up to ID checks

Banks promoting "online" accounts have been the beneficiaries of an anomaly in financial services industry regulation that has allowed them to open savings accounts without having to do an identification check on their customers. This exemption has given them a handy competitive advantage when it comes to setting up accounts.

But on December 12, when the next set of provisions of the Anti-Money Laundering and Counter-Terrorism Financing Act come into force, online banks will lose that advantage. They will have to start doing ID checks on their customers.

Because they will have ID obligations imposed on them for the first time they face the challenge of finding data sources and building systems that will allow them to carry out that procedure online. They run the risk that if they don't get it right their competitive advantage will turn into a costly disadvantage.

The AML/CTF Act was passed in December last year but it is being implemented in stages over a two year period. December 12 is the implementation date for Part 2 of the Act, dealing with identification procedures.

The Act says: "A reporting entity must carry out a procedure to verify a customer's identity before providing a designated service to the customer… A reporting entity must carry out ongoing customer due diligence."

The identification procedures in the AML/CTF Act supersede the rules in the Financial Transaction Reports Act. Under FTRA there was no requirement for banks opening online savings accounts to ask customers for ID; this is because the online account must be linked to a transaction account with another financial institution and that other institution will have done a 100 point check already.

ING Bank chief financial officer Mark Mullington describes online savings accounts as "closed loop accounts".

Mullington said: "Money moving in and out of an ING Savings Maximiser account can only go through the customer's transaction account. It is a closed loop.

"At the moment we do not have to identify the customer. ING Direct was the first bank into this market and we got an opinion from the Attorney-General's Department on our interpretation of FTRA.

"They agreed with our view and that has been the standard approach up to now. Some banks may do a full check when they open online savings accounts but that is for marketing purposes. They are looking to sell other banking products to that customer."

AML/CTF captures online banks because it applies to any financial institution selling a designated product or service. Also, it involves ongoing monitoring of customers and not just an identification process when an account is opened.

Banks that deal with customers online, such as ING Direct, BankWest and Rabobank's new online business Raboplus, have to develop IT infrastructure that will allow them to gather customer information and they have to find external parties that can verify the information their customers give them.

Because AML/CTF is risk-based legislation, where each institution makes an assessment of its risks and devises an appropriate solution, there is no single procedure being sanctioned by the AML/CTF regulator Austrac.