I must get this question 2-3 times per month from individuals who have had their funds frozen (mostly without reason) by financial institutions, and in particular banks. The question that always comes up with whether the bank having held the funds is legal?
The Unfortunate Answer
Yes, a bank can hold your funds for anti-money laundering (AML) related reasons. Banks and other financial institutions have an obligation to comply with anti-money laundering laws and regulations promulgated under the Bank Secrecy Act (BSA) to prevent money laundering, terrorist financing, and other illicit activities. As part of their due diligence, banks must continue to monitor customer transactions and accounts for suspicious activities and report them to the relevant authorities.
If a bank suspects that funds in an account are involved in money laundering or other illicit activities, they have the authority to freeze or hold the funds temporarily. This action is typically taken to investigate the suspicious activity and gather more information. Banks are required to follow the guidelines and procedures outlined by the BSA and its enabling regulation regarding the freezing and holding of funds in such cases.
What many people do not notice is that in addition to having the authority to hold funds based on the BSA, your agreement with the bank mirrors the regulations and acts as a contract right of the bank to withhold your funds.
How Long?
In the United States, the specific duration for which a bank can hold funds for AML related reasons can vary. The holding period depends on several factors, including the nature of the suspicious activity, the progress of the investigation, and the guidance provided by regulatory authorities. Under the BSA and related regulations, banks are required to file a Suspicious Activity Report (SAR) when they detect transactions or activities that may indicate money laundering or other illicit activities. Once a SAR is filed, the bank may choose to freeze or place a hold on the associated funds temporarily to allow for further investigation.
The duration of the hold can vary based on the complexity of the investigation and the cooperation of the involved parties. In some cases, the funds may be held for a relatively short period, such as a few days or weeks. However, if the investigation requires more time or involves multiple parties, the hold can extend for several months or longer. It’s important to note that the bank is required to act in a “timely” manner and should complete its investigation within a “reasonable period.” If the investigation does not yield evidence of money laundering or other illicit activities, the funds should be released “promptly.”
Unfortunately, there is nothing in the BSA that sets a precise duration for how long a bank can hold funds for AML related reasons. While the BSA and its implementing regulations provide guidance on AML requirements for financial institutions, including the obligation to file SARs and the authority to freeze or place holds on funds in certain circumstances. However, the BSA does not specify a specific timeframe for holding funds.
Resolution?
Banks do have certain obligations to consumers under the BSA once they have held their funds for AML related reasons. These obligations are aimed at ensuring transparency, providing due process, and protecting the rights of customers. Here are some of the key obligations:
- Notification: When a bank freezes or places a hold on funds due to AML concerns, they are generally required to provide timely and appropriate notification to the account holder. This notification should inform the customer of the reason for the hold, any relevant legal provisions or regulations, and the process for resolving the issue.
- Documentation and Information: Banks should provide the account holder with clear information regarding the documentation or information required to resolve the AML concerns. This may include requests for additional identification documents, explanations of the suspicious activity under investigation, or any other relevant details.
- Updates on Investigation: Banks are expected to keep customers reasonably informed about the progress of the AML investigation and the status of their frozen funds. While there may not be a specific timeline requirement, the account holder should receive periodic updates and have the opportunity to provide information or documentation to address the concerns.
- Resolution and Release of Funds: Once the AML investigation is completed and there is no evidence of illicit activity, banks should promptly release the funds to the account holder. If the investigation does reveal suspicious activity, the bank may be required to file a Suspicious Activity Report (SAR) with the appropriate regulatory authorities.
But, again, there is nothing concrete in the BSA that dictates such matters as what information the notice must contain, how often the bank must update you and how long the bank can take to investigate the matter.
Conclusion
The unfortunately reality in 2023 is that banks can hold your funds on an almost arbitrary basis. Many individuals who ask me about this problem have received deposits from crypto exchanges – which themselves are regulated and have robust AML programs themselves. Engaging an attorney to press the matter is a potential solution, but the law is that necessarily on your side and the economics of doing so may not always warrant having to pay an attorney.
As always, be sure to reach out to me with any questions or book a meeting here.
About Adam Tracy
Adam Tracy is a payments expert and entrepreneur who specializes in payment systems, blockchain technology, digital currencies, and other emerging technologies. He is the founder of Blockrunner, LLC that provides consulting services to clients in the blockchain, payments and cryptocurrency arenas.
Tracy has been involved in the payments industry as an attorney, consultant and entrepreneur since 2005, while he was become an expert in blockchain and cryptocurrency since its advent in 2013. Tracy has worked with a wide range of clients, including startups, established businesses, and investor – both in the United States and worldwide. He has advised clients on a wide range of compliance, legal and operational issues related to payment transfer systems, crypto token generation and architecture, cryptocurrency exchanges, regulatory licensing, smart contracts, and other blockchain applications.
In addition to his consulting work, Tracy has founded several companies in the payments, blockchain and cryptocurrency space, including a digital asset hedge fund, licensed electronic money institution and a blockchain-based tokenization platform. He is also a proponent of decentralized finance (DeFi) and has been involved in various DeFi projects.
Tracy is also a frequent speaker and writer on blockchain and cryptocurrency topics. He has been featured in a wide range of publications, including Forbes, Hollywood Reporters, CNBC, Reuters, CoinDesk, and Bitcoin.com.
Find Adam: https://linktr.ee/adamtracy
Blockrunner, LLC., is a financial services match-making marketplace and consulting company. We are not a bank, FI/NBFI, Payment Service Provider, deposit taking institution, trust, or money services business of any kind. We are not regulated by any financial regulator. Banking, Payment, Processing, and Licensing services are provided by our participating members. This website is for informational purposes only and does not constitute legal advice. If you need legal advice, please consult a licensed attorney in your jurisdiction.