Legal regulation of bank         agents:Current legislation and recommendations               for the future              ...
©      Russian Microfinance Center,       Institute for Financial Technologies,       2011       This Survey was conducted...
Table of contentIntroduction ……………….………………………………………………………………………….4       Key conclusions and recommendations…………………….. ......
Introduction         The banking sector has always been a major provider of financial services to thepopulation of Russia....
- services for the provision of which it is required to open a bank account;         - services for the provision of which...
and does not provide for the delegation of the client identification function by banks to third    persons.   With a mino...
   There is a number of obstacles which are to be overcome to make the activity of bank agents    an appealing alternativ...
2.    Describing the procedure for the opening of bank accounts and savings (deposit)            accounts via bank agents,...
cooperativeMFI                  +             +              +              +Retail trade         +             +         ...
-     a card with the samples of signatures and the seal impression (with the exception of             instances when unde...
provisions relating to the adoption of by-laws of a credit institution regulating the legal regimefor the opening of bank ...
authentication method. In bank and payment systems authentication is used with electroniccertificates, plastic cards and e...
In conformity with Decree #232 the passport of a citizen of the Russian Federation shallbe the basic document in the terri...
-     details of the personality identification document, series and number of the document,             date of issuance,...
Simplified identification of a physical person presupposes the ascertaining of a familyname, name and (unless provided oth...
insurance event), and bodies of preliminary investigation in relation to cases which they are incharge of (exclusively wit...
Identification of recipients and senders by the Post of Russia        Postal services shall be understood to mean actions ...
technologies. Legal environment should be ensured for the regulation of the activity oforganizations that are operators of...
theory in this sphere, it seems reasonable to dwell on the key concepts and definitions relating toit.        The analysis...
retail payments market should be taken into consideration. Today the Russian Federation usesthree methods of settlements w...
bank in conformity with the requirements of laws and regulatory acts of the Bank of Russia andare brought to notice of ind...
-    storage of information in conformity with the requirements set to the information on            the payer – individua...
enormous turnover of funds. From the standpoint of banks, the business on the acceptance ofcash via agents (payment termin...
With regard to designation, payments for the execution of which payment agents acceptmoney from individuals, may fall into...
Pursuant to the Resolution of the RF Government of 15 November 2010, #920, a bankpayment agent shall be prohibited to:    ...
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
Legal regulation of bank agents
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Legal regulation of bank agents

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Legal regulation of bank agents

  1. 1. Legal regulation of bank agents:Current legislation and recommendations for the future Moscow 2011 1
  2. 2. © Russian Microfinance Center, Institute for Financial Technologies, 2011 This Survey was conducted within the framework of the Project “Promotion ofInnovative Regulation and Supervision over the Activity of Bank Agents to Improve Access toFinance in Russia” by the Ministry for Economic Development of the Russian Federation jointlywith the Alliance for Financial Inclusion (AFI) to implement the provisions of the SeoulDevelopment Consensus approved by the G20 countries at the Summit in Seoul in November2010 and provide for the development of innovative financial instruments. The RussianMicrofinance Center (www.rmcenter.ru) acts as a partner in this Project. The Alliance for Financial Inclusion (AFI) is a global network of central banks and otherfinancial policymaking institutions in developing countries. AFI provides its members with thetools and resources to share, develop, and implement their knowledge of financial inclusionpolicies proven to work. AFI connects policymakers through online and face to face channels,supported by grants and links to strategic partners, so policymakers can implement the mostappropriate financial inclusion policies for their country’s individual circumstances. AFI is funded by the Bill & Melinda Gates Foundation and administered by the GIZ(German International Cooperation). You can read in greater detail about goals and objectives of AFI and the principles of theSeoul Development Consensus at www.afi-global.org и news.kremlin.ru/ref_notes/769. 2
  3. 3. Table of contentIntroduction ……………….………………………………………………………………………….4 Key conclusions and recommendations…………………….. ......................................... 5 Opening of a bank account and access thereto via an agent ............................................ 9 Client identification ....................................................................................................... 11 Procedure of client identification by a bank .............................................................. 13 “Delegated” identification under the banking legislation .......................................... 15 Identification of clients by communications facilities operators ............................... 16 Identification of recipients and senders by the Post of Russia .................................. 17 Payment services ........................................................................................................... 17 Concept of settlements and settlement legal relationships ........................................ 18 Transfers without opening a bank account ................................................................ 20 Bank payment agents ................................................................................................ 22 Postal orders............................................................................................................... 26 Payments with the use of a current account ............................................................... 27 Internet and mobile banking ...................................................................................... 28 Payment cards ............................................................................................................ 29 Universal electronic payment card ................................................................................ 35 Providing public and municipal services in electronic form ..................................... 35 Banking services with the use of universal electronic card ....................................... 36 3
  4. 4. Introduction The banking sector has always been a major provider of financial services to thepopulation of Russia. It accounts for the overwhelming volume of operations relating tocrediting, accepting savings of individuals on deposits, performing settlements and moneytransfers. Apart from credit institutions, loan operations and acceptance of savings fromindividuals may be performed by law by credit cooperatives (only from the members thereof)and microfinance institutions (in the amount exceeding 1.5 million rubles):however, the volumeof such operations does not exceed 1% of bank deposits. About half of the settlements of thepopulation with housing and utility organizations and fixed-line telephony services operators areperformed via credit institutions. Credit institutions have an exclusive right to perform forexoperations. As of 1 January 2011, 2,926 subsidiaries of credit institutions operate in the territory ofthe Russian Federation. Services are provided to individuals in internal structural units of creditinstitutions, including 22,001 – in subsidiary (supplementary) offices, 11,960 – in cash offices,1,389 – in credit-cash offices, 2,994 – in back offices. Legal provisions that came into force on 1 January 2010 and regulate the activity of bankpayment agents opened up new possibilities for credit institutions regarding the expansion of thepresence thereof in the regions, creation of new additional channels for supply (sale) of bankservices, moving closer to those potential clients who so far have not been covered by banking(financial) services. This, in its turn, will allow to resolve the issue of enhancing accessibility tobank services with greater flexibility and at a qualitatively new level, without excessive costs andcreation of new bank branches and offices. Pursuant to Article13.1 of the Federal Law “On banks and banking activity” a bankpayment agent accepts money from individuals as payment for goods (work, services), taxes,fines, etc., and also to be credited on a bank account. Apart from that, bank payment agents havethe right to perform operations with bank cards and transfer instructions regarding suchtransactions. Replenishment of bank accounts via agents, and performing with the participationthereof of all the spectrum of operations with cards opens up possibilities to create on their basisnew channels for selling any bank services. This Survey studies new legal prerequisites for the activity of bank agents in Russia.Insofar, a bank agent shall be understood to mean a legal entity or an individual entrepreneur, who on the basis of a paid-services contract concluded with a credit institution, participates in bank operations (transactions) performed by a credit institution with individuals, and also accepts money from individuals for the account of execution of obligations on such transactions, or pays money to individuals for the account of execution of obligations by a credit institution. For the purpose of this Survey it is necessary to study legal possibilities for attractingagents to perform all kinds of operations (services) provided by credit institutions: - depositary, i.e. operations to attract the funds of individuals to savings (deposit) accounts, - loan, i.e. operations on issuing loans; - payment, i.e. operations relating to making payments and executing money transfers; - investment, i.e. operations to manage funds and securities of individuals. The necessity to open (use) a bank account, i.e. concluding a bank account agreementbetween an individual and a bank, will be a major criterion for practical classification of theabove operations. Hence, all the services provided by banks to the clients thereof with theparticipation of bank agents are subdivided into two groups: 4
  5. 5. - services for the provision of which it is required to open a bank account; - services for the provision of which it is not required to open a bank account. Among the four groups of operations (services) those should be singled out that inprinciple cannot be provided without the opening of bank accounts: services relating to deposits,and most likely, investment services (it is necessary to open a savings (deposit) account to safekeep securities). Loan operations may be performed with cash when a loan is issued and repaidwithout the opening of a bank account. This possibility is provided by law. However, in real lifesuch products are offered by microfinance institutions and rarely by banks. Payment services hold a special place in the activity of bank agents. One might say that inRussian practices bank agents “grew” out of the payment sphere. Similar processes occurred inthe markets of retail financial services in Brazil, Mexico and a number of other countries.Payment services are in greatest demand of the population, therefore the supply thereof at thetime of launching new business models produces the best possible commercial effect. Payment operations are the basis for offering other banking products, since both increditing and in operations on deposits there is a transfer (movement) of funds. Generally speaking, payments may be executed in non-cash form, that is, via bankaccounts, and without the opening of a bank account. In retail payment sector three models aredominating which have different legal basis: - payments via bank accounts with the use of bank cards; - money transfers without the opening of a bank account, for instance, payments for housing and utility services; - payments via payment agents for acceptance of payments of individuals and bank payment agents (including payments via terminals), for instance, payments for mobile communications services, housing and utility services, etc. Absence of a law on the national payment system creates a considerable legal ambiguity.The State Duma adopted this draft law in the first reading on 10 December 2010. The law, mostprobably, will finally establish a legal regime for the functioning of the mobile payment systems,e-money and “terminal” payments. This Survey studies the Russian specifics of legal regulation of the banking activity andout-of-the-office (branchless) provision of services, in parallel analyses the current status of theretail financial market and gives an overview of the accumulated world expertise in the area.Only such an approach allows to form an integral picture of regulatory, organizational,commodity and technological changes, and to identify issues of legal regulation hindering thedevelopment of a bank agency (agent banking) model in Russia. The effective regulatory basis isanalyzed as of 1 January 2011. Key conclusions and recommendations The Survey allows to reach a number of important conclusions and recommendationswhich are presented briefly in this section. A more detailed analysis is contained in the final partof the Survey. The RF Civil Code and the Law “On banks and banking activity” do not contain any prohibitions regarding the attraction of bank payment agents to and the participation thereof in provision by banks of loan, savings and investment services to individuals. Major restrictions to use bank agents are established in regulatory legal acts of the Bank of Russia. This is accounted for by a consistent, but not always commensurate implementation of the “know your client” principle. One of the most critical restrictions placed on the activity of bank agents are the rules of the Law “On countering legalization (laundering) of criminal gains”. The Law requires that bank clients (and beneficiaries) be identified when a wide range of operations is conducted 5
  6. 6. and does not provide for the delegation of the client identification function by banks to third persons. With a minor adjustment of the Law the bank client identification may be delegated by banks to other persons who, pursuant to the effective laws, will be carrying out ascertainment of personality and identification of individuals. The effective Russian law knows examples of “delegated” identification, used, for instance in the pension legislation. It would be reasonable to legally state the possibility to conclude civil law contracts by a credit institution authorizing the counterpart thereof to carry out bank clients’ identification. The legislation does not directly use the concept of bank clients’ authentication. In practice when a number of bank operations are performed, it is authentication of clients, not identification, which takes place. Incorporation of the above term (in the sense which was just described) into the law would allow to make the wordings in the law more precise and flexible. Another important issue is the expansion of the bank agents’ functional range, including the assistance in out-of-the-office (branchless) opening of bank accounts and collection of the documents necessary for the purpose (certification of copies of documents). The procedure of client due diligence when a bank account is opened for him/her may be separated from the identification procedure. It seems reasonable to provide for an opportunity to open special accounts which have a certain limit on the volume of operations, if the procedure of opening of such an account via an agent is simplified and is performed out of the office (in a branchless manner). The concept of the client’s “personal presence” at the time of opening an account should be specified. For the purpose, a special procedure for client identification should be spelled out, including the place of identification procedure and the list of persons who perform the above procedure. The Bank of Russia has the broadest powers in regulating legal relationships in the course of operations with bank cards. In the absence of a special law, by way of changing the regulatory legal basis of the Bank of Russia, optimal conditions could be created for bank agents to exercise respective operations. In regulating operations with bank cards the Bank of Russia moves towards the replacement of client identification by the authentication thereof. This opens up broad opportunities for performance of operations with bank cards via bank agents. In fact, it seems necessary to grant an agent the right to issue cash from a bank card without using an ATM, but via the POS-terminals (cash back operations at POS). The amount of such operations may be limited. Certain kinds of agents may be granted the right to issue cash from any account, not just the client’s card account. The existing legal approaches towards classification and regulation of settlement (payment) relationships are non-systemic and inconsistent. The most problematic sphere is the regulation of settlements (payments) exercised in cash and non-cash form at the same time, that is, in instances when only one of the parties has a bank account. At the same time, either in the legislation or in the doctrine there is no unanimity of views with regard to classifying such payments either as cash or non-cash. Since such payments are of particular importance for the retail market, we propose to regard them separately as a special form of payments. Provisions relating to a bank secret are not a serious limitation on the activity of bank agents, since with the consent of a client a bank secret may be disclosed to third persons (bank agents). At the same time, the rights of an agent to receive and transfer to a client the documents on bank accounts and operations are not provided for directly. Literal interpretation of the laws on personal data allows to draw a conclusion that a bank payment agent shall be recognized as an operator of personal data. When processing such data a payment agent shall be obliged to receive the consent of the client and ensure that the data shall not be disclosed and remain confidential. Without access to personal data a bank agent will not be able to identify the client. 6
  7. 7.  There is a number of obstacles which are to be overcome to make the activity of bank agents an appealing alternative for credit institutions and their clients. An important condition for legal regulation of the agents’ activity is the account of the latter’s economic interests, including the establishment of the commission fee amount. In the sphere of consumer protection when services are provided by bank payment agents the most essential risk is that the payer-consumer might transfer the money either to a wrong person or to a wrong account and he/she will not know how to correct the mistake, and also the risks that the payer-consumer might lose his/her personal identifier or it might be intercepted by a fraudster. Despite the fact that the bank is fully liable for operations executed via an agent, one should not overrule a possibility of disputes between the bank and the client thereof with regard to the validity of certain operations executed in the name of the client. The effective legislation on consumer rights protection does not provide for effective mechanisms to mitigate the above risks or a procedure for consumer actions when such risks are realized. The laws fail to provide for prompt and low cost ways of extrajudicial resolution of disputes between consumers and financial intermediaries. With regard to bank loan operations a special Law “On consumer loan” should be adopted which would establish the specifics of relationships referring to consumer loans, and the introduce the concept of a loan broker. Combining the activity of a loan broker and that of a payment agent will allow to significantly enhance the efficiency of these financial intermediaries. The adoption of a series of laws between 2007 and 2010 regulating the activity of professional creditors (pawn shops, credit cooperatives and microfinance institutions) raised a number of systemic legal issues relating to the regulation of loan agreements and credit contracts. The effective legislation allows to authorize the above professional creditors for the functions of bank payment agents, which will make it possible to considerably expand the spectrum of services provided by them. The uniform requirements on the part of the Bank of Russia to the opening of bank accounts and savings (deposit) accounts do not create particular difficulties for opening savings (deposit) accounts via agents. Given the fact that performing settlement operations on savings (deposit) accounts may be restricted, it would be rational to provide for a simplified procedure for opening such accounts (considering lower risk of legalization of criminal gains). Along with banks, credit cooperatives and, on certain conditions, microfinance institutions have been granted the right to accept savings from individuals (deposits in the economic sense). Despite the obvious economic similarity, the contractual law nature of the above relationships is principally different. This makes it impossible to use (bank) payment agents for the transfer of savings to cooperatives or MFIs. The activity of mobile communications facilities operators on providing services of mobile banking fails to conform to the current banking legislation on payment agents. The legal structure of mobile banking operators services in many ways are similar to legal schemes that provide for the functioning of non-bank electronic payment systems that use the so called e-wallets for settlements. It is necessary for the legislator to determine at soonest the terms, procedure and rules for the provision of mobile banking services by non-bank institutions. At the same time they may be transformed into bank payment agents. Hence, three basic legal and regulatory objectives should be singled out to beimplemented within the framework of the Project: 1. Establishing the procedure of “delegated” identification of bank clients with the participation of agents; 7
  8. 8. 2. Describing the procedure for the opening of bank accounts and savings (deposit) accounts via bank agents, and the participation thereof in the issue of bank payment cards operations; 3. Regulating the activity of bank agents on the part of the Bank of Russia and the oversight of the activity of bank agents by credit institutions, which should also include the consumer protection aspect. The proposed regulatory and legal changes should be in our view implemented in threestages. Two factors should be taken into account in the process: - the difference in the legal status of various groups of persons acting as bank agents. Specifically, a distinction could be made between (i) agents obligated to monitor operations with funds due to the requirements under the legislation on countering legalization (laundering) of criminal gains, (ii) agents engaged in personality identification of individuals in conformity with the requirements of special laws, and (iii) other agents; - different degree of technical equipment and readiness of different groups of bank agents to exercise client identification, perform actions on branchless (out-of-the- office) opening of bank accounts and operations with cash. At the first stage a group of best prepared agents can be admitted to identification of bankclients for the purpose of opening savings (deposit) accounts on the basis of contracts with acredit institution, such as: postal service organizations, communications facilities operators,notaries public, credit cooperatives, microfinance institutions, municipal authorities. Creditinstitutions that operate in the regions can identify individuals for the benefit of other (federal)credit institutions (banks) while providing services within the framework of regional programs.The model of “bank-for-bank” identification may be in demand in instances when a non-bankcredit institution identifies a bank client for the subsequent opening of a savings (deposit)account. The most reliable bank agents should be granted the right to gather documents andidentify bank clients within the framework of branchless opening of savings (deposit) accountsprograms, which do not provide for settlement operations. At the second stage other kinds of bank agents may be allowed to engage in the bankclient identification on the basis of instructions from banks and civil law contracts with them,specifically: economic societies (retail trade organizations, service sphere organizations, etc.)The most reliable bank agents should be granted the right to collect documents and identify bankclients in programs of branchless opening of bank accounts, including card accounts (with a totallimit on the amount of operations and the balance on the account). Certain agents get the right toissue cash from the client’s accounts and to issue bank loans in cash. At the third stage a limited group of agents may get the right to collect documents andengage in identification of bank clients within the programs of branchless opening of “standard”bank accounts, issuance of bank cards, etc. The list of bank operations performed via such agentsmay be maximally broad, including settlement, loan, savings and investment operations. Kinds of bank agents and operations performed by them Acceptance Identification Branchless (out- Issuance of a Filing a loan Issuance of of payments of-the-office) bank card application a loan, opening of an return of a account depositPostal service + + + + + +organizationCommunications +facilitiesoperatorNotary Public + + + +Municipal + + + +authority bodyCredit + + + + 8
  9. 9. cooperativeMFI + + + +Retail trade + + + +organization Opening of a bank account and access thereto via an agent In the Russian language the term “account” and “bank account” may be used in differentmeanings. In book accounting the term means a position in the books reflecting the status and themovement of funds, tangible and other assets. Chapter 45 of the RF Civil Code introduces aconcept of “bank account” as a kind of a civil law contract. Article 11 of the Tax Code definesan account as a settlement, current and other bank accounts that are opened on the grounds ofbank account agreements, and to which funds are credited and from which money oforganizations, individual entrepreneurs, notaries public engaged in private practice, attorneyswho founded a legal office may be disbursed. In this Survey a bank account shall be understood as a civil law bank account agreementwhich is concluded by a credit institution with the clients thereof. Under this agreement the bankshall be obligated to accept and credit funds transferred to an account opened to the client(account holder), execute client’s instructions on the transfer of funds and issuance of respectiveamounts from the account, as well as performance of other on the account (Article 845,paragraph 1, of the RF Civil Code). Out of all the diversity of bank accounts we would like to analyze those kinds that areopened to individuals for performing operations which are not related to entrepreneurial activity.They include current accounts and savings (deposit) accounts of individuals. Current accounts are opened by banks to individuals to perform settlement operations notrelated to entrepreneurial activity or private practice. Various forms of settlements establishedby law may be used in non-cash settlements on such accounts: settlements by payment orders,letters of credit, cheques, and payment collection. Savings (deposit) accounts are opened to individuals for accounting funds placed in creditinstitutions (branches thereof) in order to receive income in the form of interest calculated as apercentage of the funds placed on the savings account. A savings (deposit) account differs fromother bank accounts with regard to the number of banking operations performed on it and doesnot fully conform to the concept of an “account”. It is opened on the initiative of a creditinstitution on the grounds of a bank account agreement and it does not provide for settlementoperations to be performed on it. The grounds for the opening of a bank account, savings (deposit) account shall be a bankaccount agreement and presenting of all the respective documents specified by the laws of theRussian Federation. A bank account is opened to a client if: - a respective contract is concluded; - the bank received all the necessary documents; - client identification procedure was carried out in conformity with the Federal Law “On countering legalization (laundering) of criminal gains and financing terrorism” (hereinafter Law#115-FZ). In accordance with the Instruction of the Central Bank of the Russian Federation of 14September 2006, #28-I “On opening and closing bank accounts, savings (deposit0 accounts” toopen a current account to an individual the following package of documents shall be filed to thebank: - a document certifying the personality of an individual; 9
  10. 10. - a card with the samples of signatures and the seal impression (with the exception of instances when under the RF laws the opening of a bank account, savings (deposit) account is determined by the availability of documents which are not specified in the Instruction of the Central Bank dated 14 September 2006, #28-I; - the documents confirming the powers of persons specified in the card with samples of signatures and the seal impression issued to dispose of the funds that are on the bank account (if such powers are transferred to third persons), and if the agreement provides for the certification of rights to dispose of the funds on the account by third persons with the use of the analogue of the true signature, the documents certifying the powers of persons who are granted the right to use the analogue of one’s true signature; - a certificate on the registration with the tax authority (if available). For an individual to open a savings (deposit) account the following set of documentsshould be filed to the bank: - a document certifying the personality of an individual; - a certificate on the registration with the tax body (if available). If a bank account agreement provides for the possibility of settlements with the use of asavings (deposit account), a card with the samples of signatures should be presented. At the sametime, documents shall be provided certifying the powers of persons specified in the card todispose of the funds on the account, if such powers are transferred to third persons. If a bank account agreement provides for the certification of rights to dispose of the fundson the account by third persons with the use of the analogue of the own true signature,documents shall be provided certifying the rights of persons who are granted the right to use theanalogue of the own true signature. Apart from the above documents to be filed, a bank has the right to request from apotential client additional documents allowing to identify thereof. In so doing a credit institutionshall be obligated to take well grounded and comprehensible measures to identify beneficiariesirrespective of civil law consequences of performing operations with money and other assets. Important specifics is related to the procedure of filing documents by a potential client inorder to open an account. For the opening of a bank account, savings account the originals of the documents shouldbe filed or the copies thereof notarized in accordance with the procedure established by the lawsof the Russian Federation. In instances provided for by the bank rules, documents which are filed when a bankaccount, savings account is opened may be certified by an official of the bank (anotherauthorized person of the bank) in accordance with the procedure described below. An official ofthe bank (another person authorized by the bank) shall have the right to certify copies ofdocuments to be filed by a client (representative thereof) for the opening of a bank account,savings (deposit) account. An official of the bank or another person authorized by the bank who is a bank officermakes an inscription on the document “the copy is true” and specifies his family name, name,patronymic (if any), position or the details of the identification document, and also applies histrue signature and the impression of the seal established for such purposes by the bank. Another person authorized by the bank, but not a person on the staff of the bank, makesan inscription “the copy is true” on the documents and specifies his family name, name,patronymic (if any), position, the details of the identification document, and also applies his truesignature and the impression of the seal established for such purposes by the bank. The documents (the copies thereof) gathered by the bank at the time of opening a bankaccount, savings (deposit) account are placed into a legal file. Chapter 10 of the Instruction ofthe Central Bank of the Russian Federation, dated 14 September, #28-I establishes therequirements regarding the maintenance of the client’s legal file, and also stipulates the 10
  11. 11. provisions relating to the adoption of by-laws of a credit institution regulating the legal regimefor the opening of bank accounts and savings (deposit) accounts. In the event of several bank accounts, savings (deposit) accounts of one client opened inone bank, one legal file may be formed regarding several accounts of the client. If a person who applies to the bank for the opening of a bank account, savings (deposit)account is a representative of several clients, the bank shall have the right to place the copies ofdocuments (or information about the details thereof) certifying the personality of therepresentative, and also the documents confirming the respective powers vested in him, into thelegal file of one of the clients in whose interests the representative acts. At the same time, legalfiles of certain clients should contain information pointing to the legal file in which the abovedocuments of the representative of these clients are placed. The procedure for forming legal filesof clients is determined by the bank in its by-laws. Clients identification A most significant legal limitation regarding the use of bank agents today is, most likely,the existence of rigid requirements to bank clients’ identification. The rule “know your client”applied to financial institutions is set as a priority by governments in their initiatives to countermoney laundering and financing terrorism. Regulation in this sphere introduces mandatoryrequirements to the “transparency” of account holders, payers and recipients, including in theleast the client personality identification. This is a particularly complicated problem in the eventof branchless (out-of-the-office) bank services for two reasons. A general condition for banking activity is the observance of the “know your client” rule.When a certain bank operation is performed - an opening of an account, issuance of a loan,acceptance of a deposit, execution of payment – a credit institution must identify the person whoit is dealing with, unless provided otherwise by law. In the Federal Law “On countering legalization (laundering) of criminal gains andfinancing terrorism” #115-FZ (hereinafter Law 115-FZ) this procedure is called identification ofclients and beneficiaries by a bank. Given the objective of this Survey, it will be assumed furtherin the text that both persons named above concur. Concept of identification. Let us analyze in greater detail the concept of identificationwhich is also closely related to the authentication and authorization categories. In a most general case identification is a procedure to establish the identity of an object.In the Dictionary of Foreign Words the concept “identification” is understood as sameness,likening, establishing concurrence of something with something. In the Explanatory Dictionaryof the Russian Language by S.I.Ozhegov and N.Y.Shvedova the word “to identify” means toestablish concurrence, identity. In banking activity not only the subjects are identified (individuals, legal entities) butobjects too (documents, securities, signatures, etc.). For the purposes of countering legalizationof criminal gains identification procedure is carried out exclusively with regard to individualsand legal entities. Identification should not be confused either with authentication or authorization. Authentication is a check of whether the identifier presented by a person actually belongsto him/her, as well as the confirmation of the authenticity of an object or a subject. One of theways of authentication in a computer system presupposes the entering of a user’s identifier,called “login” in common speech (Eng. “Login” is a registration name of a user) and a passwordwhich is confidential information the knowledge of which insures the possession of a certainresource. Having received the entered login and password, the computer system comparesthereof with the meaning that is stored in a special data base, and if they concur, the user getsaccess to the system. The document (textual) input of login and password is not the only 11
  12. 12. authentication method. In bank and payment systems authentication is used with electroniccertificates, plastic cards and even biometric devices, such as scanners of the human iris, finger-or palm prints. Lately an expanded or multiple-factor authentication has been used, i.e. when severalcomponents are used: information known to the user (password), physical components (forinstance, authentication key rings or smart cards) and personality identification technologies(biometric data). In interbank settlement system the authentication procedure is used when information isexchanged by computers, and most sophisticated cryptographic protocols are used providing forthe protection of communication line against lurking or substitution of one of the participants inthe interaction. As a rule, authentication is necessary for both objects establishing networkinteraction, since it should be mutual. The process of granting the rights to a person to execute certain actions, confirmation ofthe possession of such rights is called authorization. In the banking sphere “authorization” ismeant to be understood as the verification of the user’s right to perform a transaction executed inthe point of service which should result in either the permission or prohibition to a client toperform operations (for instance, performing a sales act, receiving cash, access to resources orservices). In information technologies rights of access to resources and data processing systems areestablished and implemented via authorization. In financial sphere authorization is conductedwhen bank payment, credit or other cards are used. Hence, the basis for identification is to ascertain the personality of an individual. Personality identification. Neither Law #115-FZ, nor the regulatory frameworkdeveloped on the basis thereof use the concept of “personality identification”. In legal surveysand research that were available we failed to find the comparison of concepts “identification of aperson” and “personality identification”. It seems that the content of the above categories shouldcorrelate in the following manner. As a rule, personality identification is understood in law asactual actions (process) of an authorized person aimed to find out the personality of an individualwho is personally present. Such actions presuppose a check of the personality identificationdocument and finding out whether the document belongs to the individual who presented it. In contrast to personality identification the identification of a person may be conductedboth with regard to individuals (physical persons) and organizations (legal entities). Apart fromthat, it may be possible to identify not only persons who are present in person, but those who areabsent in the place where identification of persons is carried out. Identification of a personpresupposes gathering broader data than personality identification. The concept “personality identification” (as a procedure) is well developed in procedurallaw. For instance, Article 42 of the Basic Principles of the Russian Federation on the NotariesSystem approved by the Supreme Court of the Russian Federation on 11 February 1993, #4462-1introduces a concept of identification of the personality of an individual who applied for a notaryact. Personality identification shall be conducted on the basis of a passport or other documentswhich exclude any doubts regarding the personality of an individual who applied for theexecution of a notarial act. The category “personality identification” is also used in the Code of AdministrativeOffences (Articles 27.1 and 27.5), Criminal Code of Procedure of the Russian Federation and anumber of other legal acts. Pursuant to Article 265 of the Criminal Code of Procedure of theRussian Federation, personality identification suggests ascertainment of family name, name,patronymic, date, month, day and place of birth of an individual. The Passport of a citizen of the Russian Federation. The key document on the basiswhereof the personality of an individual and citizen of the Russian Federation is identified is thepassport of a citizen of the Russian Federation. A special Federal law regulating the relationshipswhich arise in connection with the issuance of the passport has not been adopted yet. This sphereis governed by three Decrees of the President of the Russian Federation. 12
  13. 13. In conformity with Decree #232 the passport of a citizen of the Russian Federation shallbe the basic document in the territory of the Russian Federation. In pursuance of the PresidentialDecree, the Government of Russia adopted RF Resolution #828 “On the approval of theRegulations On the passport of a citizen of the Russian Federation, the sample form anddescription of the passport of a citizen of the Russian Federation”, dated 8 July 1997. All the citizens of the Russian Federation who have reached fourteen and residing in theterritory of the Russian Federation shall be obligated to have a passport. The data listed belowshall be entered into the passport: family name, name, patronymic, date and place of birth. Check of the personality identification documents. Examination of the client’s passport(or another identification document) makes up the foundation for client identification procedure.In this connection it seems reasonable to remind of the procedure for examination of personalityidentification documents. It is recommended to examine the presented document in three stages: authentication ofthe document, checking whether the document really belongs to the holder thereof, detectingsigns of changes in the original content. If signs of changes in the original content are detected, itis necessary to thoroughly examine not only the face of the form with the photograph, but theback too. The analysis of forensic examination of documents shows that one of the most popularways to change the content in the document is to substitute the photo. The substitution of thephotograph in most cases occurs with personality identification documents. The photograph ofthe owner of the document may be replaced by a photograph of another person either in full or inpart. In order to protect the document from counterfeiting, the photograph and the form arefixed with the impression of either the mastic or relief stamp. Today for the protection ofdocuments they are laminated with the use of special polymer films and fixed with a hologram.Indirect ways of protecting documents from counterfeiting may include signing of thephotograph with the initials of the owner on the back of the photograph when the documents areaccepted for formalization. Some of the photographs are glued to the passport of a citizen of theRussian Federation with special glue. Thus, the person authorized to identify the personality of a bank client should have acertain special knowledge to be able to detect at least the most obvious cases of counterfeitingidentification documents of an individual, and thus bring down the number of identificationerrors to a minimum. Procedure of client identification by a bank A credit institution shall be obligated to identify a person serviced thereby (a client) whenbank operations and other transactions are performed in conformity with the Federal Law “Onbanks and banking activity”. The Bank of Russia established requirements to the identification ofclients and beneficiaries by banks in the Regulations “On identification of clients andbeneficiaries by credit institutions to counter legalization (laundering) of criminal gains andfinancing terrorism” (approved by the RF CBR, # 262-P, of 19 August 2004). A credit institutionmust develop and approve a program for client identification, ascertainment and identification ofbeneficiaries including the procedure of identification of above persons, and also the procedurefor assessing the degree (level) of risk regarding the performance of operations by such clients. Identification of clients-individuals is carried out on the basis of documents andinformation gathered by a credit institution, the list of which is provided by law and the mostimportant of which are those listed below: - family name, name and patronymic; - date and place of birth; - citizenship; 13
  14. 14. - details of the personality identification document, series and number of the document, date of issuance, name of the body that issued the document and the code of the unit (of any); - residence (registration) or temporary residence address. Identification of a client-individual, establishment and identification of a beneficiary shallnot be carried out - when organizations performing operations with money or other assets of clients accept payments in the amount not exceeding 15 thousand rubles (or the equivalent amount in foreign currency), - when an individual performs an operation on purchase or sale of foreign currency in cash for the amount not exceeding 15 thousand rubles (the equivalent amount in foreign currency); - with the exception of instances when an employee of a credit institution performing operations with money or other assets, has suspicions that this particular operation with money or other assets is exercised to legalize (launder) criminal gains or finance terrorism. The documents filed by a client should be valid as of the date of filing thereof and bemade in the Russian language. The documents made fully or in some part thereof in a foreignlanguage shall be filed to a credit institution with a Russian translation duly notarized. In theevent information necessary for the identification of a potential client and beneficiary which isavailable to a credit institution is insufficient, it may be obtained from other governmentagencies. A form recommended by the Bank of Russia to record information received in theprocess of identifying a client and establishing the beneficiary thereof – a client’s form (file) -shall be filled both in paper and electronic form. The form of the file per se shall be determinedindependently by a credit institution. In conformity with Bank of Russia Regulations #262-P the client’s form shall include thefollowing information: 1. Information received as the result of the client identification procedure, ascertainmentand identification of the beneficiary. 2. Information on the degree (level) of risk, including the justification of risk assessment. 3. The date of the start of relationships with the client, specifically, the opening date ofthe first bank account (bank deposit). 4. The date of filling in and updating the client’s form (file). 5. The family name, name and patronymic, the position of the officer in charge ofworking with the client, specifically the officer who opened the account and approved of openingthe account, account manager (if any).. 6. The signature of a person who filled in the client form (file) on paper carrier(specifying the family name, name (unless provided otherwise by the law or national custom)and/or family name, name and (unless provided otherwise by the law or national custom)patronymic, position of the person who filled in the client form (file) on electronic carrier. 7. Other information at the discretion of a credit institution. Pursuant to a general law, repeated identification of a client shall not be allowed, with theexception of instances when doubts arise with a credit institution regarding the reliability ofinformation received earlier as the result of the identification program. When certain kinds of banking operations are performed by a credit institution simplifiedidentification may be applied. Simplified identification of an individual is provided for if: - money is transferred upon the instruction of individuals without opening bank accounts; - bank operations and other transactions with cash in foreign and RF currency and cheques (including travel cheques) are performed while the nominal value thereof is denominated in foreign currency; 14
  15. 15. Simplified identification of a physical person presupposes the ascertaining of a familyname, name and (unless provided otherwise by the law or national custom) patronymic, detailsof the personality identification document of a client. A credit institution must pay increasing attention to operations with money funds or otherassets that are performed by clients who present greater degree (level) of risk “Delegated” identification in banking legislation A credit institution identifies clients and beneficiaries in its own interest. In other words,banks identify their clients, not the clients of other banks. On the other hand, the Bank of Russiaallows that the acceptance of personality identification documents of a client – individual, thecheck of the duly formalized documents and the completeness of information provided, thereliability of such information, certification of copies of documents be executed both by anofficer of a credit institution and another person authorized by a credit institution who is not onthe staff thereof. All the above actions may be performed out of the office of a credit institutionand with the use of appropriate communications facilities (postal, electronic).1. A logical comparison of the above provisions leads to a question whether a bank thataccepts documents of a client of another bank has the right to check them? A positive answer tothis question would open up the way to the so called “delegated identification” of bank clients -when one bank (the officers thereof) carry out the identification procedure in the interest of othercredit institutions. In which way could the order for such identification be formalized? In other words, an objective could be set that the identification of a physical personperformed by one credit institution should be “recognized” by other credit institutions. Suchidentification could be demonstrated in the transfer of a client form (file) (on condition of non-violation of requirements relating to a bank secret). As noted above, such “tertiary” identificationoccurs when individuals perform operations with bank cards. Servicing via an ATM a holder of abank card that was issued by another bank a credit institution proceeds from an assumption thatthis particular holder is identical to the person who was identified by an issuing bank, since thecardholder entered the correct PIN-code. The effective clarifications of the Bank of Russia provide a negative answer to the abovequestions. The confirmation of that stand can be found in the Central Bank of Russia Letter “Onidentification” of 31 August 2007, #12-1-5/1971. In it the Bank of Russia states the following: ifa credit institution assigned the right (claim) on the Loan Agreement concluded by the creditorand an individual borrower to another organization, an individual borrower shall be a client ofthe credit institution to which the rights of creditor regarding the above Agreement weretransferred, and this credit institution shall be obligated to identify this individual borrower, thatis, to gather necessary documents and information. Actually this means that a bank which is anassignee shall be obligated to perform identification of a client even when it is a singular legalsuccessor in relationships with the client. If a borrower-individual in order to repay a loan to a new creditor needs to open bankaccounts, paragraph 5 of Article 7 of Law#115-FZ should be taken into account pursuant towhich credit institutions are prohibited to open accounts (savings accounts) to individualswithout the presence of a person who opens an account, or his/her representative. Certain difficulties also arise since the concept “delegated” identification should agree withthe legal requirements on the bank secret and personal data protection. According to Article 26of the Law on banks, a credit institution guarantees the secrecy of operations, accounts anddeposits of its clients. Documents on the account status and saving accounts of individuals shallbe issued by a credit institution personally the client him or herself, courts, agencies that enforcejudicial acts, acts of other bodies and officials, Deposit Insurance Agency (if there is an 1 The CBR Letter “Generalization of practices on the issuance of bank cards and performance of operationswith the use thereof” of 25 September 2009, #117-N. 15
  16. 16. insurance event), and bodies of preliminary investigation in relation to cases which they are incharge of (exclusively with the consent of the head of the investigating body). Bank paymentagents are not mentioned in this connection. This Article also stipulates that bank payment agents guarantee the secrecy of informationabout operations on accounts and the accounts of individuals whose payments are accepted bythem pursuant to Article 13.1 of this Federal Law. At the same time, the law does not provide forthe right of bank payment agents to receive documents on accounts and savings of individualsupon the instruction of the latter. It is not clear from the provision of the law whether an agentshould keep a bank secret in the instance when he does not accept payments from a bank’s client,but vice versa, pays the loan amount, or when an agent is used only as a channel of access tobank information. The law does not give an answer to the question in which form should theclient’s consent be expressed for bank payment agents to have access to information whichconstitutes the client’s bank secret. By force of Article 3 of the Federal Law “On personal data” of 27 July 2006, #152-FZ,a bank payment agent becomes an operator of personal data and is obligated to ensureconfidentiality thereof (Article 7). Without access to personal data an agent will not be able toidentify a client. Thus, a client of a bank payment agent should be ready that his/her personaldata will be potentially available to all bank agents of the bank of his choice. The law does notanswer to the question in which form should the client’s consent be expressed regardingprocessing (Article 9) and transfer of his/her personal to any of the bank’s agents. Identification of clients by communications facilities operators While discussing the issue of “delegating” identification of clients by banks to otherorganizations (bank payment agents), let us dwell on the issue of identification (establishingidentity) of clients that is performed by other organizations in conformity with special laws notrelated to performing operations with money. By force of law identification of clients (establishing senders and recipients) should beconducted by communications facilities operators and organizations of federal postal service.Despite the fact that in this instance identification is carried out for purposes different from thoserelating to legalizations (laundering) of criminal gains and financing terrorism, the assessment ofpractices existing in this sphere may prove useful for improving procedures and mechanismsaimed to develop bank services with the use of agency schemes. The legislation provides for two forms of concluding a contract between a client and anoperator: - by drawing up a contract in writing, and - by way of exercising contracting bargains (implicative actions):. If the prior form is rather popular and typical, the latter may be expressed in variouscontracting bargains (implicative actions): for instance, in payment, or in acceptance by way of a“clicking” to a reference box marked “agree” after reading a public offer placed on the officialsite of a communications facility operator, etc. The rules provide for a possibility to use the second form only in the event when a fixedterm contract on providing one-time services to transfer data in collective points of access isconcluded. The moment when a subscriber and (or) user starts the actions aimed to establishconnection via the data transfer network (communication session) is recognized as the time ofconcluding the contract. 16
  17. 17. Identification of recipients and senders by the Post of Russia Postal services shall be understood to mean actions or activity on receipt, processing,transportation, delivery (serving) of postal items, as well as exercising money transfers (Article 2of the Federal Law “On postal service” of 17 July 1999, #176-FZ, hereinafter – Law#176-FZ). Credit institutions broadly use postal services not only to send to the clients thereofpromotion and advertizing information, account statements, bank cards, but also to receiveinformation from their clients, which is necessary for client identification and serve otherdocuments in the hands of the clients. Postal services are provided to banks by postal service operators who have the right toprovide postal services. Postal services are rendered on the basis of an appropriate license. Pursuant to Article 16 of Law#176-FZ, postal services are provided on a contractualbasis. Under a Contract of Postal Services a postal service operator shall be obligated to send,upon the instruction of the sender, the postal item entrusted to him or to transfer money by postalorder to the address specified by the sender and deliver (serve) it to the addressee. Users ofpostal services have the right to receive postal items and postal orders at their postal addressposte restante or using the slots in subscribers’ postal racks. In conformity with the Rules for providing postal services approved by the Resolution ofthe Government of the Russian Federation of 15 April 2005, #221, depending on the way ofprocessing, postal items are subdivided into two categories: - regular postal items accepted from the sender without issuance of a receipt and delivered (served) to the addressee (or the legal representative thereof) without his/her signature confirming receipt; - registered mail (registered items with declared value,) accepted from the sender with the issuance of acceptance receipt and served to the addressee (his/her legal representative) with the signature thereof confirming receipt. Pursuant to paragraph 34 of the Rules, delivery (service) of regular postal itemsaddressed poste restante, registered postal items, and the issuance of postal orders to addressees(legal representatives thereof) shall be executed upon presentation of identification documents.Thus, when regular postal items addressed poste restante and registered postal items are sent, thepostal service operator shall be obligated to ascertain the personality of the individual to whomthe item is served, and in case of a registered postal item, the operator must also get a signatureof receipt from the addressee. Notification about registered postal items are placed to the slots of subscribers postalracks, postal subscribers’ boxes, postal boxes of postal stations in conformity with addressesinscribed on them, unless provided otherwise by a contract between a postal service operator andthe user of the postal service. Under paragraph 47 of the Rules, postal services operators may also certify Powers ofAttorney of individuals for their representatives to receive correspondence addressed to them.Such Power of Attorney may be issued with regard to all and any letters and postal orders of anaddressee. Certification of a Power of Attorney issued by an individual presupposes the latter’spersonality identification by the postal service operator. Payment services The payment system occupies an important place in the financial infrastructure created bythe Government of Russia. As noted in the “Strategy for the development of the banking Systemof the Russian Federation for the period up to 2015”, the payment system “should have as itsfoundation modern, complex and balanced legal regulation and use up-to-date standards and 17
  18. 18. technologies. Legal environment should be ensured for the regulation of the activity oforganizations that are operators of money transfers, including e-money operators. Suchregulation should also cover operations with the participation of payment agents (sub-agents),operators of payment systems, operators of payment infrastructure (operation centers, clearingcenters, settlement centers); the requirements to organization and functioning of paymentsystems should be set, and the supervision and monitoring procedures in the national paymentsystem be developed”. A significant element in the payment system is the system of retail payments, that is, anaggregate of organizations, processes, technologies and infrastructure ensuring the execution ofpayments and settlements of individuals. An efficient retail payment system should ensure 100 percent coverage of the populationof Russia, irrespective of geographical location, level of wealth and preferences in consumption.The citizens of Russia should have a possibility to make choices when performing paymentoperations in cash and non-cash form, from a bank account or via postal order, in bank offices orout of the bank offices (branchless services). An important role in providing territorial access to payment and other banking servicesshould belong to (bank) payment agents with regard to whom regulation saw considerablechanges between 2009 and 2010. Concept of settlements and settlement relationships So far no comprehensive and consistent system of terms and concepts has been formedwith regard to legal regulation of payments and settlements. Along with the existence of detailedrules and regulations applied to certain forms of non-cash settlements, drastic differences areobserved in doctrinal and theoretical constructions relating to the payment sphere described byRussian legal scholars. Among other things, this may be accounted for by gaps in the regulationof payment services and relationships regarding settlements both at the level laws andregulations (regulatory acts of the Bank of Russia). An authorized regulatory body is notdetermined for certain retail segments of the market, which also negatively tells on the body oflaws and regulations. Greater clarity in the regulation of payment services (including retail services) mustappear with the adoption of the Federal Law “On the national payment system”. As noted in theExplanatory note to the draft law submitted by the Government of the Russian Federation to theState Duma (draft #455931-5), “the effective laws of the Russian Federation fail to form asystemic legal framework regulating legal relationships in the sphere of national paymentsystem. The object of legal regulation of Chapter 46 “Settlements” of the Civil Code of theRussian Federation is the sphere of relations between banks and clients within the range ofvarious forms of non-cash settlements which are currently applied. As for relationships which arise in organization and functioning of the payment systemand the use of payment infrastructure, the above provisions may be applied to them to a limiteddegree;… for the development of the national payment system legal support of paymentinnovations is of great significance, innovations which appear as the result of technologicaldevelopment (e-money, web-payments, mobile payments), as well as the general environmentfor a comprehensive application of electronic means of payment and electronic facilities forprocessing payment information. In this connection it is necessary to take into account thetechnological specifics and the adequate reflection thereof in the provisions of laws relating tothe national payment system”. According to D.G.Alekseeva and S.V. Pykhtin, the issue of determining the legal natureof settlement relationships has for a long time been a subject for scholarly debate; meanwhile nosingle position on the above issue has been developed. Given the insufficient completeness oflegal regulation of payment relationships and a whole number of unresolved issues of general 18
  19. 19. theory in this sphere, it seems reasonable to dwell on the key concepts and definitions relating toit. The analysis of opinions in legal literature that refer to determining the legal nature ofsettlement relationships allows to single out two approaches. The idea of the first one is thatsettlement relationships do not have their independent meaning as an object of special legalregulation; and since they do not have an independent economic meaning, their role is auxiliary.No new (added) value is created as the result of such relationships; they just determine therelations between the payer and the recipient of funds at the time of payment execution andrelate mostly to the external form of actions performed by those who participate in the paymentof agents (subjects). The second approach to determining the legal nature of settlementrelationships is, vice versa, based on the recognition of independent nature of settlements due toa specific subject composition and the object used in such relationships. This allows to regardsettlement relationships as a separate kind of civil law relations. This approach is based on theessence of non-cash settlements as one of the two known ways to execute settlements, whichpresupposes that a bank account agreement is concluded by the debtor and the creditor withcredit institutions servicing thereof to repay the money liability which has arisen. Just as many debates arise with regard to the means (ways, procedures) of settlements(settlement legal relationships). Article 861 of the RF Civil Code stipulates for two settlementprocedures: in cash - when the debtor physically transfers money to the creditor, and settlementsin a non-cash form, via credit institutions through bank accounts opened therein. Article 862 ofthe RF Civil Code establishes several forms of non-cash settlements: settlements by paymentorders, letters of credit, cheques, encashment, and settlements in other forms provided by thelaw. Such classification is not grounds enough for introducing a single legal category ofsettlement relationships which would combine cash and non-cash settlements. Civil law expertstend to think that when settlements are made in cash no separate liabilities arise regardingsettlements. The transfer of money is usually an action on the part of the debtor to execute arespective money obligation which is part of a civil law liability on the transfer of goods,execution of work or rendering of services. That is why the existing legal regulation ofsettlements in cash is limited by relationships with the participation of legal entities andindividuals engaged in entrepreneurial activity, and is manifested in the restriction on suchsettlements. In the opinion of the respected scholars even the participation of a bank in therelationships analyzed is not sufficient grounds to consider such relations as settlements. Thereare quite a number of instances, note M.I.Braginsky and V.V. Vitryansky, when banks provideservices to individuals who do not have a bank account on transferring money or accepting andeffecting various payments, for instance, to utilities services or tax agencies. In such situations,despite the direct participation of a bank in respective relationships, no particular settlementrelations requiring special regulations arise, and actually existing legal relations are liabilitieswith regard to providing services for compensation which are related to the money transfer. Thecomposition of subjects in such kind of liabilities may also include a different (not a bank)provider of money transfer services, such as communications agencies, specializedorganizations, etc. Hence, the scholars referred to above actually place an equality sign between non-cashsettlements and settlement relations which are understood as relations arising between theaccount holder – the payer (recipient of money funds) and the bank where the payer’s bankaccount is opened, and other banks involved in the performance of the respective bank operationin connection with the execution of instruction of the account holder regarding the transfer(receipt) of money placed on the bank account in the procedure of non-cash settlements. When developing a comprehensive and consistent classification of kinds (ways) ofsettlements (payments) both the opinion of respected civil law scholars and practical needs of 19
  20. 20. retail payments market should be taken into consideration. Today the Russian Federation usesthree methods of settlements with the participation of individuals: - direct transfer of cash by the payer to the recipient, - non-cash settlements on bank accounts of the payer and recipient, including settlements with the use of bank cards, - transfer by an individual – the payer – of cash to a credit institution with an instruction regarding the money transfer without opening an account, or to a specialized intermediary (payment agent, bank payment agent) with an instruction to make payment to be credited to the bank account of the recipient. The discussion about where the third mechanism belongs to – either cash or non-cashsettlements – does not seem very productive. We propose to consider it as an independentprocedure of settlements (payments) which includes several forms: - money transfers by credit institutions on the instruction of individuals without opening bank accounts (with the exception of postal orders); - payments of individuals made with the participation of bank payment agents exercising the activity thereof basing on Article 13.1 of Law On Banks, - payments of individuals via a payment agent who is engaged in activity on accepting payments of individuals on the grounds of the Federal Law “On Activity exercised by payment agents on the acceptance of payments from individuals”, of 3 June 2009, #103-FZ (version of 8 May 2010) (hereinafter Law #103-FZ). Certain authors raise an issue of the legal nature of settlements via mobile banking of cellcommunication operators. In conformity with the dominating viewpoint regarding the legalnature of non-cash settlements, in the process of non-cash settlements rights of claim of clientsare addressed to banks regarding the payment of funds in the amounts transferred by clients tothe credit institution. However, when settlements are executed with the mobile bankingtechnologies of a communications facility operator, it seems more appropriate to speak aboutaddressing the right of claim of a subscriber to the operator of cellular communications, whilethe contract for communication services will be the legal grounds for making payments. In mobile banking of communications facilities operators not only personal (telephone)accounts of subscribers may be used, but also their bank accounts, bank accounts of suppliers ofgoods (services), and bank accounts of third persons who are not suppliers of goods or services.Insofar, there is no necessity to pay cash to the communications facility operator to perform asettlement operation, which is a specific feature of a bank operation on the transfer of fundswithout opening a bank account. Given such specifics of mobile banking by communicationsfacilities operators, it is possible to arrive at a conclusion that such settlement technologies are inessence similar to bank transfer technologies, since they allow to transfer funds in non-cash formfrom one bank account to another. There is only one difference: communications facilitiesoperators act beyond the rules and regulations for performing non-cash settlements which areestablished by the Bank of Russia. When non-cash settlements are performed de facto by communications facilitiesoperators on the basis of a contract on communications services a lot of questions of legal naturearise, for instance, what are the grounds for writing off the funds of a subscriber from his/herbank card by a communications facility operator which is not provided by the bank accountagreement, without the use of a payment document, PIN-code, and without whatevermanipulations with a bank card per se. Money transfers without opening a bank account Banking operations on the transfer of funds - which are not related to entrepreneurialactivity of individuals and are performed on the instruction of individuals without opening acurrent account - may be executed both in favor of legal entities and in favor of individuals. Theprocedure and terms for conducting operations on the transfer of funds are established by the 20
  21. 21. bank in conformity with the requirements of laws and regulatory acts of the Bank of Russia andare brought to notice of individuals in a clear and understandable form, which presupposesplacing information in places where clients are served, including internal structural units ofbanks, and are considered accepted by individuals upon the latter’s signing of a document for thetransfer of funds. The above operation provides for the transfer of funds by a bank on the instruction of anindividual – the payer, who does not have an account in this or other bank, to an account of aperson specified by the payer either in this or another bank, and shall be executed pursuant toparagraph 2, Article 863 of the Civil Code of the Russian Federation based on the rules ofparagraph 2 “Settlements by payment orders”. Transfer of funds upon the instruction of individuals without the opening of a bankaccount may be of two kinds: - when a recipient has a bank account in a credit institution and the funds are credited to this account, - when a recipient, an individual, has no bank account and the money is transferred to him without being credited to a bank account. Depending on the kind of the transfer the composition of data to be filled in by the senderof the transfer, the content of payment order which is issued by a credit institution, and thereflection of this operation on the books of the bank will be different. If an individual who has no bank or savings (deposit) account in a credit institution is arecipient of funds, the money received is accounted for in the credit institution of the recipient onthe latter’s personal account opened on account 40905 “Current accounts of authorized personsand unpaid money transfers (postal orders)”. The legal regime of such funds is in many wayssimilar to that of funds on a bank account. As specified in the Letter of the Ministry of Financeof the Russian Federation of 31 October 2006, #03-04-03/28, the specifics of bank moneytransfers without opening a bank account lies in the potential risk that either the transfer will notbe completed, or credit risk for the credit institution of the recipient (depending on the settlementprocedure) might arise due to the movement of money from the sender of the transfer to therecipient, and in the event of interbank transfer, from the sender’s credit institution to the creditinstitution of the recipient. Thus, in the event of insolvency of a credit institution the recipient ofthe money transfer will acquire the right of claim for the transfer amount. Banks perform operations on the transfer of funds on the instruction of an individualwithout the opening of a bank account on the grounds of a document the form of which isestablished by banks, an individual or the respective recipient of funds to whose addresspayments are sent, provided that in the document or the bank contract with the recipient of fundsall the details necessary for the transfer of money are specified, as well as the individual numberof the taxpayer (INN) (if any), or any other information on the payer established by Article 7.2 ofLaw#115-FZ. On the grounds of the above law, the banks fill in the payment order using form0401060 (paragraphs 1.2.1 -1.2.3. of Regulations #222-P). It should be taken into account that though there is no necessity to open a current accountand there is no check of the owner of funds, Law #115-FZ establishes strict liability of bankswith regard to gathering and storing information on the payer and the recipient of payment (withthe exception of money transfers made on the instruction of individuals without opening of bankaccounts performed by credit institutions for the amount not exceeding 15,000 rubles or theequivalent currency amount). A credit institution servicing the payer shall be obligated to ensure at all stages: - monitoring of the availability of information, - completeness of information, - transfer of information either in the settlement documents or in some other way, - conformity of information that is provided (by the payer) to the information available to the credit institution; and 21
  22. 22. - storage of information in conformity with the requirements set to the information on the payer – individual, specifically: family name, name, patronymic (unless provided otherwise by law or national custom), unique number assigned to the operation (if any), individual identification number of the taxpayer (if any), or the residence or temporary residence address. If in the settlement document or other document containing the instruction of the payerthere is no information specified above, or if such information is not received in another way, acredit institution servicing the payer shall be obligated to refuse to execute the order(instruction). A credit institution shall be also obliged to ensure the consistency of informationcontained in the received settlement document, and the storage thereof in conformity with therequirements of the law. A credit institution servicing recipients of transfers shall be obligated to have proceduresnecessary to identify the received settlement documents which fail to include the information onthe payer. If there is no such information in the settlement or other documents received, and ifsuspicions arise with the officers of a credit institution that the operation is performed to legalize(launder) criminal gains or financing terrorism, a credit institution shall be obliged no later thanthe business day following the day when such an operation was recognized as suspicious toforward information about such an operation to an authorized body in conformity with thisFederal Law. As noted above, it does not seem possible to discuss any special form of non-cashsettlements with regard to transfer without opening a bank account, in this case we would ratherspeak about provision of services under the contract of money transfer by a bank; such serviceswith the use of certain elements of non-cash settlements may be provided, for instance, bycommunication facilities organizations. Bank payment agents In 2009 the Federal Law “On banks” of 3 June 2009, #121-FZ introduced a concept of abank payment agent. The respective provisions came into force in full on 1 April 2010. Theadoption of a new Federal Law “On the activity relating to the acceptance of payments fromindividuals exercised by bank payment agents” of 3 June 2009, #103-FZ was followed by theincorporation of respective amendments to the legislation. Thus, the legislator had logicallycompleted the process started back in 2006 and aimed at the development of the legal frameworkensuring the activity of payment agents (bank and non-bank). The initial goal was to enhanceaccessibility of payment and financial services at large for the citizens of Russia. In 2006 the first attempt was undertaken to regulate this issue through the incorporationof a new Article (Article13.1) to the Law “On banks”. This Article recognized the activity on theacceptance of payments from individuals exercised by a commercial organization (which is not acredit institution) as a bank operation on the transfer of funds of individuals without opening abank account. Later on amendments that were incorporated were sharply criticized. They did notmake it possible to resolve all the problems, introduced confusion into the regulation of activityon accepting payments from individuals, and thus, confirmed the necessity of separate legalregulation of this sphere. Most participants in the cash payments market would not use theproposed model of legal relations and continued to exercise the activity thereof basing on thegeneral civil law principles. In changing the version of Article 13.1 the objective of the legislator was to setrequirements to bank payment agents similar to those established in Law#103-FZ with regard tothe activity of (non-bank) payment agents on accepting payments from individuals. The interest of banks to the acceptance of cash funds via bank payment agents (terminals)as a promising area for the development of the business thereof is related not only to the 22
  23. 23. enormous turnover of funds. From the standpoint of banks, the business on the acceptance ofcash via agents (payment terminals) could be subdivided into two areas: - acceptance of payments in favor of providers of various services; - acceptance of payments in favor of a bank and offering clients another service channel. The major differences between these areas lie in their role in the business of a bank. Thefirst area is a source for direct income from remuneration and commission fees. In the secondinstance, the acceptance of payments network serves as a tool for the expansion of a bank’spresence in the retail market. The acceptance of the own bank payments is different from collection of payments infavor of providers of services primarily due to the fact that the latter is not a source of directincome, but a way to promote bank products and to expand retail network. The main goals are toattract a client through a possibility to perform bank operations with cash without a client havingto travel to the bank’s office, and to bring the point of bank’s presence as close to the client aspossible. A private client may use bank payment agents (payment terminals) to repay loans,replenish accounts and cards. Apart from that, a payment terminal may be used for the promotionof other bank products with the help of contextually targeted advertizing demonstrated on thescreen of the terminal. The appeal of payment terminals for banks is accounted for by the cost thereof which is 8to 10 times lower than the cost to open a cash office. Expenses for the regular service of apayment terminal are also lower than respective costs for an ATM and cash office. Thedevelopment of a payment terminals network is particularly profitable to banks working activelywith retail clients and planning to expand their retail network. The broad use of payment terminals may encourage the development of electronicbanking for retail clients. In such instance one of the major problems could be resolved:replenishment of an account or a card of an individual who receives salary or wages in cash. The use of bank agents (payment terminals) is also possible for the purpose of automationof the bank front office. It is common knowledge that most clients address the bank office withfairly simple requests: to place the money on a savings account, settlement account, bank card,pay a fee on the loan, etc. The servicing of such clients could be entrusted to payment terminals,not operation officers. Ideally, front office bank employees should be personally working onlywith those clients whom it is not possible to service without human involvement. It should benoted that banks can and must combine to the maximum in the activity thereof two major areasin the use of payment terminals: the more opportunities are opening up, the more attractive is thecomplex of services for individuals, and the greater financial dividends will be received by abank. Thus, developing business on acceptance of cash via payment terminals a bank is resolvingthe following tasks: - receipt of revenue from a commission fee and remuneration for payments transferred via terminals; - automation of bank retail network; - expansion of a bank and winning a segment of the market at an early stage of development to ensure stable income in future. Pursuant to Article 13.1 of the Law “On banks”, shall be recognized as bank paymentagents (i) organizations which are not credit institutions, and (ii) individual entrepreneursretained by a credit institutions to - accept from individuals money for payments of particular designation, - perform operations with the use of payment cards; - transfer to a credit institution instructions of individuals to execute settlements on their bank accounts and draw up documents confirming respective operations. The above payments and operations should not be related to entrepreneurial activity andprivate practice performed by an individual. 23
  24. 24. With regard to designation, payments for the execution of which payment agents acceptmoney from individuals, may fall into three categories: - payments to state power bodies, local self-government bodies and institutions in the jurisdiction of the latter within the range of functions performed by them established by the laws of the Russian Federation (for instance, payment of taxes, collections, duties, etc.)., - execution of money liabilities of individuals with regard to payments for goods, works, services (for instance, payment for the mobile communications operator services); - crediting of money to a bank account of an individual (for instance, to repay a loan). The activity of a bank agent on accepting money from individuals shall be calledacceptance of payments of individuals. Currently there exist two forms for exercising activity on accepting money fromindividuals: via payment agents whose rights are established by Law #103-FZ, and via bankpayment agents whose activity is regulated by laws on banks and banking activity (specifically,Article 13.1 of the Law “On banks”). In contrast to bank payment agents, payment agents regulated by Law #103-FZ may beretained to perform a narrower range of payments. Payment agents accepting money fromindividuals have no right to accept payments when settlements are executed, as provided by thelaws on banks and banking activity. Article 5 of the Law “On banks” contains an exhaustive listof bank operations and other transactions which a credit institution is entitled to perform.Respectively, payments made by individuals within the framework of relationships arising frombank operations and bank transactions cannot be executed via bank agents. Hence, bank paymentagents are granted broader rights in exercising activity on acceptance payments from individualsas compared with payment agents. In order to accept payments from individuals a bank payment agent should conclude acontract with a credit institution under which a bank payment agent shall have the right in hisname or in the name of a credit institution, and for the account of a credit institution acceptpayments from individuals; a bank payment agent shall be obligated to make further settlementswith a credit institution, including orders on the disbursement of cash that was received by thecash office of a legal entity or a cash office of an individual entrepreneur. Insofar, a bankpayment agent shall have no right to reassign to other persons the acceptance of payments fromindividuals. It is noteworthy that in practice a payment agent may conclude contracts on theacceptance of money from individuals both with a credit institution and a payment operator.Thus, he at the same time acquires the status of a payment agent by force of Article 13.1 of theLaw “On banks” and by force of Law #103-FZ. Such combination of activity shall not beprohibited by the legislation. A credit institution with which a bank payment agent has concluded a contract shall beobliged to exercise monitoring over the observance of the procedure for accepting payments by apayment agent in conformity with the rules for executing settlements in the Russian Federationestablished by the Bank of Russia, requirements of Article 13.1 of the Law On banks and Law#115-FZ. Failure to observe the above requirements shall be grounds for a credit institution tocancel the contract on the activity relating to acceptance of payments from individuals with suchan agent. A bank payment agent shall be obliged to use the cash register equipment with fiscalmemory and a control tape and observe the requirements of the legislation of the RussianFederation on the application of cash register equipment. In contrast to a payment agent, a bankpayment agent when accepting payments of individuals shall have the right to use not onlypayment terminals, but also the ATMs. As in the case with payment agents, the Government ofthe Russian Federation shall be entitled to establish a list of goods, works, services in paymentfor which a payment agent may not accept payments from individuals. 24
  25. 25. Pursuant to the Resolution of the RF Government of 15 November 2010, #920, a bankpayment agent shall be prohibited to: - accept lottery stakes, with the exception of All-Russia government lotteries held in an on-line regime; - accept payments for lottery tickets, receipts and other documents certifying the right to participate in a lottery; - accept stakes to participate in gambling. Bank payment agents shall be obliged to observe a whole number of strict requirementsset by Article 13.1 of the Law “On banks”, specifically, to: - observe the rules of the Bank of Russia on the exeсution of settlements in the Russian Federation; - use a separate bank account (accounts) to execute settlements on acceptance of payments; - turn over to a credit institution cash received from payers when accepting payments for the funds to be credited in full to a separate bank account (accounts) of a bank payment agent; - use cash-register equipment with fiscal memory and control tape, and observe requirements of the laws of the Russian Federation on the use of the cash register equipment when executing settlements in cash. Acceptance of payments of individuals by a bank payment agent must be followed by anissuance of a cash register receipt certifying the execution of the respective payment. Federal law #140-FZ of 27 July 2006, which originally incorporated Article 13.1 into theLaw “On banks”, also introduced amendments to the Law “On the protection of consumerrights” of 7 February 1992, #2300-1. By force of Article 37 of the Law, in the event cashsettlements are used, liabilities of a consumer to a seller (executor) with regard to payment forgoods (works, services) shall be deemed executed in the amount of money paid and from themoment the cash amount is paid respectively to the seller (executor) or a credit institution, or apayment agent who exercises activity on accepting payments from individuals in conformitywith the legislation on banks and banking activity. Therefore, liability to pay for goods (works,services) shall be deemed executed from the date the money amount is transferred from theconsumer directly to the seller or an institution in charge of transfer of funds to the account of aseller. It should be noted that in international practices the objectives of protection of rights offinancial services consumers are understood differently and considerably broader. The conductof financial services providers should be determined by three major principles, irrespective of thekind of the service provided. The following requirements are set thereto: - clear disclosure of key information on respective issues prior, at the time and after the performance of a transaction; - fair and ethical attitude towards clients, and also - ensuring the tools which would allow to apply for assistance to correct errors, consider complaints and resolve disputes effectively. Given the above, it is possible to draw a conclusion that the rule incorporated into theLaw on Consumer protection is relevant not so much to the protection of the rights thereof, as tothe civil law issue about the moment of execution of obligations. In violation of general legallogics the issue is resolved differently depending on whether an individual who transfers cash formaking payment is recognized to be a consumer or not. Another violation of systemic approacharises due to the fact that Article 37 speaks exclusively about the obligations of a consumer to aseller (executor) regarding payment for goods (works, services). Meanwhile, payment agentsmay accept money as payment of taxes or to be credited to a bank account. The legislation failsto provide a direct answer to the question from which moment the tax is considered paid or fundsare considered credited to a bank account. Moreover, Article 37 mentions only payment in cash.As noted above, the transfer of money on the instruction of an individual without the opening of 25

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