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Since late September, Russian banks have been permitted to suspend suspicious client transactions and block clients’ bank cards for up to two business days. The new law may cause certain inconveniences for people and businesses.

The aim of the new amendments to the law On National Payment System is to make payments more secure and reduce the risk of fraud. With its enactment, blocking of suspicious transactions of individuals and businesses becomes a routine procedure, just like regular phone calls from banks.

It is quite simple – in theory. According to the new legislation, the Russian Central Bank determines red flags marking cash transactions made without the client’s knowledge and publishes them. Payment infrastructure operators, in turn, develop in-house procedures based on their internal regulations to enable prompt detection of unauthorized transactions and response scenarios.

The legislation caused a heated public debate and, we should say, rightfully so. The concern is that the banks – more precisely, clients rather than operators - might face major challenges in implementing their new mandate.

How Will It Work?

The law instructs operators of payment infrastructure to block transactions and means of electronic payment (i.e. cards) for up to two business days if any suspicious transactions are identified.

Banks are supposed to contact their clients immediately to check if the payment was authorized. If the client consented to the transaction, the bank will proceed with it; otherwise the transaction will be executed after two business days.

With corporate clients, banks are permitted to suspend debiting cash to the recipient’s account for up to five business days and request the recipient to provide documents evidencing that the transfer is legitimate.

Logically, if no such documents are provided, the funds are returned to the sender. In practice, the banks’ actions may lead to delays in payments. For companies, late payments are a source of trouble, leading to material losses and default on contractual obligations.

Hidden Traps

The Russian Central Bank is supposed to publish its criteria for suspicious transactions which means that criminals can plan ahead their illegal activities to avoid red flags. It is to be expected that the banks, to be on the safe side, will block all transactions that seem even a little bit suspicious, rather than miss an unauthorized operation which the client may report to the regulator. Individual clients are likely to face a lot of false alerts from the security system. Clearly, a card may be blocked unexpectedly at the most inconvenient time – for example, when you are using it abroad.

Moreover, banks are permitted to block for up to two business days both the transaction and the means of payment, i.e. the card. To comprehend the extent of possible inconvenience, just imagine that you card is blocked on Friday night when you travel outside of Russia.

It is not entirely clear how the bank will identify the client to make sure that he consented to the transaction and it is not a fraud. Now most banks call their clients, but the phone can also be compromised or be out of the coverage area, so chances are that banks will require clients to come to the office with the passport for an identity check.

Apparently, in our example with the travelling client, visiting the bank’s office is not an option. Even in Russia, it can sometimes take a lot of time to get to a bank’s office, especially if your bank is a small one.

With corporate clients, there are a lot of concerns, too. A bank is, in fact, mandated to act as a judicial body: it is required to evaluate documents submitted by the payment recipient and decide whether they are sufficient to execute the transaction. As a Russian classical author wondered, “Who are these judges?” More precisely, who will conduct such a check at the bank? What level of skills should such an employee possess? 

Red Tape

There is another consideration here. The Russian Central Bank requires that banks comply with anti-money laundering and terrorist financing laws.

It is safe to say that control functions will overlap. The bank, realizing that two days are not enough to verify the transaction, will request more documents and confirmations referring to anti-money laundering procedures.

As a result, clients will have to submit more documents without knowing what the bank actually needs. Most probably, documents will be handled by less qualified staff who will not have adequate expertise or knowledge to correctly analyze each transaction; it is always easier to decline a transaction that to authorize it.

To sum up, it is fair to say that the new law and the measures introduced by it will make money transfers more complicated and will cause ever-increasing inconvenience to clients. Regretfully, the Russian judicial system does not have the mobility required to resolve disputes between banks and their clients; so before changes can be made to the law On National Payment System, a simple and prompt mechanism needs to be developed to settle disputes associated with payments.