Nov 26, 2014 - Revised to require enhanced CDD measures. ⢠Non-residents. ⢠Private banking. ⢠Personal asset hold
26/11/2014
Enhanced Due Diligence Hamish Armstrong Financial crime policy
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Legislative changes
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Legislative changes (1) • Legislative changes – Money Laundering (Amendment No. 6) (Jersey) Order 2013 (“MLO Amendment 6”) • In force with effect from 18 December 2013
– Money Laundering (Amendment No. 7) (Jersey) Order 2014 (“MLO Amendment 7”) • In force with effect from 27 October 2014
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Legislative changes (2) • MONEYVAL progress report – Written analysis recommended • Designation of higher risk customers in legislation, e.g. – – – –
Non-residents Private banking Personal asset holding vehicles Companies with nominee shareholders/bearer shares
• Prohibition on application of simplified measures to customers in countries that do not comply with FATF Recommendations • Identification of third parties on whose behalf customer acts – even when simplified measures may be applied 4
Legislative changes (3) • Article 15 – Revised to require enhanced CDD measures • • • •
Non-residents Private banking Personal asset holding vehicles Companies with nominee shareholders/bearer shares
• Articles 17 and 18 – Revised to prevent the application of simplified identification measures to customers resident in countries that do not apply FATF Recommendations • Appendix D2 of AML/CFT Handbook– Sources 1 and 2
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Legislative changes (4) • Article 17 – “Basic” information on third parties to be collected at time that simplified measures applied • Limited to those with “significant” interests – Hold 25% or more interest in relationship – Other measures for “executionary” relationships
– Further details • Consultation Paper No. 3 2014 (issued June 2014) • Feedback on Consultation Paper No. 3 (issued September 2014) • NB: In force with effect from 27 October 2014
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AML/CFT Handbooks
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AML/CFT Handbooks (1) • AML/CFT Handbooks – Amendments consequential to MLO Amendment 6 and MLO Amendment 7 – Other catch-up and presentational improvements – Outlined in Position Paper AML 2014 (issued July 2014)
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AML/CFT Handbooks (2) • AML/CFT Handbooks Current section Topic
Proposed section
Section 3
Enhanced CDD
Section 7
Section 4
Reliance on obliged persons
Section 5
Section 4
Enhanced CDD (higher risk customers) Section 7
Section 4
Simplified CDD
Section 7
Section 9
Existing customers
Section 4
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AML/CFT Handbooks (3) • AML/CFT Handbooks – Consultation Paper AML 1 2014 (issued August 2014) • Closed
– Consultation Paper AML 2 2014 (issued September 2014) • Closed
– Consultation Paper AML 3 2014 (issued October 2014) • Closes on 28 November 2014 10
AML/CFT Handbooks (4) • AML/CFT Handbooks – Consultation Paper AML 4 2014 (issued November 2014) • Sector specific section: trust company business • Closes on 5 December 2014
– Consultation Paper AML 5 2014 (to be issued December 2014) • Guidance paper: funds and fund operators • One month consultation
– Consultation Paper AML 6 2014 (issued 21 November 2014) • Product and service guide: prepaid cards • One month consultation – 19 December
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AML/CFT Handbooks (5) • AML/CFT Handbooks – Supervision for compliance with new AML/CFT Codes • From 1 January 2015 (or later as appropriate) – Findings and recommendations to take account of time needed to remediate
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Section 7 – Enhanced and simplified identification measures
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Section 7 (1) • Application of enhanced CDD measures – Lists cases when enhanced CDD must be applied • Higher risk – On basis of customer risk assessment
• Other cases – Use of risk-based approach encouraged taking account of “net risk” » » » »
Not physically present Relevant connection to higher risk state Customer or other person is PEP Correspondent banking 14
Section 7 (2) • Application of enhanced CDD measures – Lists cases when enhanced CDD must be applied • Other cases (new) – Use of risk-based approach encouraged taking account of “net risk” » » » »
Customer is non-resident Customer is provided with private banking service Customer is personal asset holding vehicle Customer is company with nominee shareholders or issues bearer shares
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Section 7 (3) • Customer is non-resident Article 1(3) MLO: a person is regarded as being resident in a country if: • •
In the case of an individual, he or she has provided an address in that country; or In the case of a legal person, the person is registered, incorporated or otherwise established under the law of that country
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Section 7 (4) • Customer is provided with a private banking service Article 15(9) MLO: service is private banking if: • the service is offered, or it is proposed to offer the service, only to persons identified by the service provider as being eligible for the service, having regard to the person’s net worth; and • the service: – involves a high value investment; – is a non-standard banking or investment service tailored to the person’s needs, or uses corporate or trust investment structures, tailored to the person’s need; or – offers opportunities for investment in more than one country or territory. 17
Section 7 (5) • Customer is personal asset holding vehicle Article 15(10) MLO: a customer is: • a legal person established by an individual for the purpose of holding assets for investment purposes, or • is acting on behalf of a legal arrangement established for the purpose of holding assets for an individual for investment purposes
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Section 7 (6) • Customer is a company with nominee shareholders or issues bearer shares Article 15(11) MLO: • No definition
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Section 7 (7) • Application of enhanced CDD measures – Measures must be commensurate with the risk – Explanation provided on nature of risk – Provides guidance on enhanced CDD measures
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Section 7 (8) • Customer is non-resident Overview Customers who are not resident in a country or territory but who nevertheless seek to form a business relationship or conduct a one-off transaction with a relevant person in that country or territory will typically have legitimate reasons for doing so. Some customers will, however, pose a risk of money laundering or financing of terrorism and may be attempting to move illicit funds away from their country or territory of residence or attempting to further conceal funds sourced from that country or territory.
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Section 7 (9) • Customer is non-resident Enhanced measures may include – Determining the reasons why the customer is looking to establish a business relationship or carry out a oneoff transaction other than in their home country or territory; – The use of external data sources to collect information on the customer and the particular country risk in order to build a customer business and risk profile similar to that available for a resident customer.
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Section 7 (10) • Customer is provided with a private banking service Overview Private banking is generally understood to be the provision of banking and investment services to high net worth clients in a closely managed relationship. It often involves complex, bespoke arrangements and high value transactions across multiple countries and territories. Such customers may therefore present a higher risk of money laundering or financing of terrorism.
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Section 7 (11) • Customer is provided with a private banking service Enhanced measures may include – Taking reasonable measures to find out the source of funds and source of wealth in line with paragraphs 24 and 25 above. – Reviewing the business relationship on at least an annual basis, including all documents, data and information obtained under identification measures in order to ensure that they are kept up to date and relevant. – Where monitoring thresholds are used, setting lower thresholds for transactions connected with the business relationship. 24
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Section 7 (12) • Customer is personal asset holding vehicle Overview Personal asset holding vehicles are legal persons or legal arrangements established by individuals for the specific purpose of holding assets for investment. The use of such persons or arrangements may make identification of ultimate beneficial owners more difficult since layering of ownership may conceal the true source or controller of the investment.
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Section 7 (13) • Customer is personal asset holding vehicle Enhanced measures may include – Understanding the structure of the vehicle, determining the purpose and rationale for making use of such a vehicle, and being satisfied that the customer’s use of such an investment vehicle has a genuine and legitimate purpose. – Taking reasonable measures to find out the source of funds and source of wealth in line with paragraphs 24 and 25 above .
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Section 7 (14) • Customer is a company with nominee shareholders or issues bearer shares Overview Companies with nominee shareholders or bearer shares may present a higher risk because such arrangements make it possible to hide the identity of the beneficial owner(s) and/or changes in beneficial ownership by separating legal and beneficial ownership, or because there is no trail of ownership, which introduces a degree of anonymity.
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Section 7 (15) • Bearer Shares – exclusions: Overview – The bearer shares are issued by a company in a country or territory that has fully enacted appropriate legislation to require bearer shares to be registered in a public registry; or – The bearer shares are traded on an approved stock exchange; or – All issued bearer shares are held in the custody of the relevant person, or trusted external party along with an undertaking from that trusted external party to inform the relevant person of any transfer or change in ownership.
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Section 7 (16) • Customer is a company with nominee shareholders Enhanced measures may include – Determining and being satisfied with the reasons why the customer is making use of nominees; and – Using external data sources to collect information on the fitness and propriety of the nominee (such as its regulated status and reputation) and the particular country risk.
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Section 7 (17) • Customer issues bearer shares Enhanced measures may include – Determining and being satisfied with the reasons why the customer has issued bearer shares; – Ensuring that any new or continued relationship or any one-off transaction is approved by the senior management of the relevant person; and – Reviewing the business relationship on at least an annual basis, including all documents, data and information obtained under identification measures in order to ensure that they are kept up to date and relevant. 30
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Section 7 (18) • Application of enhanced CDD measures – Transitional/”existing customers”? • New requirements not retrospective; no remediation project required • But: a relevant person must apply identification measures where doubts about veracity or adequacy of documents, data or information previously obtained • So: if regular review of relationship highlights that documents, data or information previously obtained do not satisfy new requirements, enhanced CDD measures must be applied to that customer at that 31 time
Section 7 (19) • Enhanced CDD measures vs simplified identification measures – Guidance on “interplay” between enhanced CDD and simplified identification measures – Factors indicating enhanced and simplified not necessarily mutually exclusive • E.g. customer is non-resident company whose securities traded on IOSCO-compliant market
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Key learning points
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Key learning points • Enhanced Due Diligence does not always mean high risk • Enhanced measures should “match” risk elements • Enhanced and simplified may both be applicable • Any other measures? 34
Suggestions welcome Risk factors
Measures
Non-resident • moving illicit funds away from their country or territory? • concealing funds sourced from that country or territory?
• Establish reasons why looking offshore • use of external data sources
• ?
• ?
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Suggestions welcome Risk factors
Measures
Private banking • • • • •
high net worth clients closely managed relationship complex, bespoke arrangements high value transactions multiple countries
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• Source of funds/wealth • Annual review • Lower monitoring thresholds
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Suggestions welcome Risk factors
Measures
personal asset holding vehicle • identification of UBO more difficult • source of investment?
• Understand structure, purpose, rationale • Source of funds/wealth
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• ?
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Suggestions welcome Risk factors
Measures
Nominee shareholders or bearer shares • Possible to hide UBO • separate legal and beneficial ownership • Degree of anonymity
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Establish reasons for use External data sources Snr. management approval Annual review
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• ?
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